Description
It talks about eligibility, brokerage, margin, legal issues, public issue, entry norms, grading
IPO
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The basic objectives of the Board were identified as: • • • • to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: • • • • It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts.
SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted in november 1998. However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was then carried out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001. SEBIs L C Gupta Committee SEBI appointed L.C.Gupta Committee on 18th November 1996 to develop appropriate regulatory framework for the derivatives trading and to recommend suggestive bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Committee was also to focus on the financial derivatives and equity derivatives. The Committee submitted its report in March 1998. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations and approved the introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" recommended by the LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI circulated the contents of the Report in June 98. The LC Gupta Committee had conducted a wide market survey with contact of several entities relevant to derivatives trading like brokers, mutual funds, banks/FIs, FIIs and merchant banks. The Committee observation was that there is a widespread recognition of the need for derivatives products including Equity, Interest Rate and Currency derivatives products. However Stock Index Futures is the most preferred product followed by stock index options. Options on individual stocks is the third in the order of preference. The participants took interviews, mostly stated that their objective in derivative trading would be hedging. But there were also a few interested in derivatives dealing for speculation or dealing. Goals of Regulation - Regulatory Objectives LCGC believes that regulation should be designed to achieve specific and well-defined goals. It is inclined towards positive regulation designed to encourage healthy activity and behaviour. The Committee outlined the goals of regulation admirably well in Paragraph 3.1 of its report. The important recommendations of L.C.Gupta Committee are reproduced hereunder. Need for coordinated development To quote from the report of the Committee -"The Committee's main concern is with equity based derivatives but it has tried to examine the need for financial derivatives in a broader perspective. Financial transactions and asset-liability positions are exposed to three broad types of price risks, viz: • • "Equities "market risk", also called "systematic risk" (which cannot be diversified away because the stock market as a whole may go up or down from time to time). "Interest rate risk (as in the case of fixed-income securities, like treasury bond holdings, whose market price could fall heavily if interest rates shot up), and
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"Exchange rate risk (where the position involves a foreign currency, as in the case of imports, exports, foreign loans or investments).
"The above classification of price risks explains the emergence of (a) equity futures, (b) interest rate futures and (c) currency futures, respectively. Equity futures have been the last to emerge. "The recent report of the RBI-appointed Committee on Capital Account Convertibility (Tarapore Committee) has expressed the view that "time is ripe for introduction of futures in currencies and interest rates to facilitate various users to have access to a wide spectrum of cost-efficient hedge mechanism" (p.24). In the same context, the Tarapore Committee has also opined that "a system of trading in futures ... is more transparent and cost-efficient than the existing system (of forward contracts)". There are inter-connections among the various kinds of financial futures, mentioned above, because the various financial markets are closely inter-linked, as the recent financial market turmoil in East and South-East Asian countries has shown. The basic principles underlying the running of futures markets and their regulation are the same. Having a common trading infrastructure will have important advantages. The Committee, therefore, feels that the attempt should be to develop an integrated market structure. SEBI-RBI coordination mechanism "As all the three types of financial derivatives are set to emerge in India in the near future, it is desirable that such development be coordinated. The Committee recommends that a formal mechanism be established for such coordination between SEBI and RBI in respect of all financial derivatives markets. This will help to avoid the problem of overlapping jurisdictions." Cash and Futures Market Relationship The Committee felt that the operations of the cash market, on which the derivatives market will be based, needed improvement in many respects. It therefore suggested improvements to the Cash Market. Derivatives Exchanges The Committee strongly favoured the introduction of financial derivatives to facilitate hedging in a most cost-efficient way against market risk. There is a need for equity derivatives, interest rate derivatives and currency derivatives. There should be phased introduction of derivatives producs. To start with, index futures to be introduced, which should be followed by options on index and later options on stocks. The derivative trading should take place on a separate segment of the existing stock exchanges with an independent governing council where the number of trading members should be limited to 40 percent of the total number. Common Governing Council and Governing Board members not allowed. The Chairman of the governing council should not be permitted to trade (broking/dealing business) on any of the stock exchanges during his term. Trading to be based on On-line screen trading with disaster recovery site. Per half hour capacity should be 4-5 times the anticipated peak load. Percentage of broker-members in the council to be prescribed by SEBI. Other recommendations of the Committee about the structure of Derivative Exchanges are as under: The settlement of derivatives to be through an independent clearing corporation/clearing house, which should become counter party for all trades or alternatively guarantee the settlement of all trades. The clearing corporation to have adequate risk containment measures and to collect margins through EFT. The derivative exchange to have both on-line trading and surveillance systems. It should disseminate trade and price information on real time basis through two information vending net works. It should inspect 100 percent of members every year. The segment can start with a minimum of 50 members. The Committee recommended separate membership for derivatives segment. Members of equity segment cannot automatically become members of derivative segment. Provision for arbitration and investor grievances cells to be set up in four regions. Provision of adequate inspection capability and all members to be inspected. Regulatory framework Regulatory control should envisage modern systems for fool-proof and fail-proof regulation.
Regulatory framework for derivatives trading envisaged two-level regulation i.e. exchange-level and SEBI-level, with considerable emphasis on self-regulatory competence of derivative exchanges under the overall supervision and guidance of SEBI. There will be complete segregation of client money at the level of trading /clearing member and even at the level of clearing corporation. Other recommendations are as under: Regulatory Role of SEBI SEBI will approve rules, bye-laws and regulations. New derivative contracts to be approved by SEBI. Derivative exchanges to provide full details of proposed contract, like - economic purposes of the contract;likely contribution to the market's development; safeguards incorporated for investor protection and fair trading. Specifications Regarding Trading Stock Exchanges to stipulate in advance trading days and hours. Each contract to have predetermined expiration date and time. Contract expiration period may not exceed 12 months. The last trading day of the trading cycle to be stipulated in advance. Membership Eligibility Criteria The trading and clearing member will have stringent eligibility conditions. The Committee recommended for separate clearing and non-clearing members. There should be separate registration with SEBI in addition to registration with the stock exchange. At least two persons should have passed the certification program approved by SEBI. A higher capital adequacy for Derivatives segment recommended than prescribed for cash market. The clearing members should deposit minimum Rs. 50 lakh with the clearing corporation and should have a net worth of Rs. 3 crore. A higher deposit proposed for Option writers. Clearing Corporation The Clearing System to be totally restructured. There should be no trading interests on board of the CC. The maximum exposure limit to be liked the deposit limit. To make the clearing system effective the Committee stressed stipulation of Initial and mark-to-market margins. Extent of Margin prescribed to co-relate to the level of volatility of particular Scrips traded. The Committee therefore recommended margins based on value at risk - 99% confidence (The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The concept is identified as "Worst Scenario Loss"). It did not favour the system of Cross-margining (This is a method of calculating margin after taking into account combined positions in futures, options, cash market etc. Hence, the total margin requirement reduces due to cross-hedges). Since margins to be adjusted frequently based on market volatility margin payments to be remitted through EFT (Electronic Funds Transfer). To prevent brokers who fail/default to provide/restore adequate margin from trading further the stock exchange must have the power/facility to disable the defaulting member from further trading. Brokers/sub-brokers also to collect margin collection from clients. Exposure limits to be on gross basis. Own/clients margin to be segregated. No set off permitted. Trading to be clearly indicated as own/clients and opening/closing out. In case of default, only own margin can be set off against members' dues and the CC should promptly transfer client's margin in separate account. CC to close out all open positions at its option. CC can also ask members to close out excess positions or it may itself close out such positions. CC may however permit special margins on members. It can withhold margin or demand additional margin. CC may prescribed maximum long/short positions by members or exposure limit in quantity / value / % of base capital. Mark to Market and Settlement There should the system of daily settlement of futures contracts. Similarly the closing price of futures to be settled on daily basis. The final settlement price to be as per the closing price of underlying security. Sales Practices
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Risk disclosure document with each client mandatory Sales personnel to pass certification exam Specific authorisation from client's board of directors/trustees
Trading Parameters • • • • • • • Each order - buy/sell and open/close Unique order identification number Regular market lot size, tick size Gross exposure limits to be specified Price bands for each derivative contract Maximum permissible open position Off line order entry permitted
Brokerage • • • Prices on the system shall be exclusive of brokerage Maximum brokerage rates shall be prescribed by the exchange Brokerage to be separately indicated in the contract note
Margins From Clients • • • • Margins to be collected from all clients/trading members Daily margins to be further collected Right of clearing member to close out positions of clients/TMs not paying daily margins Losses if any to be charged to clients/TMs and adjusted against margins
Other Recommendations • • • • Removal of the regulatory prohibition on the use of derivatives by mutual funds while making the trustees responsible to restrict the use of derivatives by mutual funds only to hedging and portfolio balancing and not for speculation. Creation of derivatives Cell, a derivatives Advisory Committee, and Economic Research Wing by SEBI. Declaration of derivatives as securities under section 2(h)(iia) of the SCRA and suitable amendment in the notification issued by the Central Government in June 1969 under section 16 of the SCRA Consequent to the committee's recommendations the following legal amendments were carried out:
Legal Amendments • • • Securities Contract Regulation Act Derivatives contract declared as a 'security' in Dec 1999 Notification in June 1969 under section 16 of SCRA banning forward trading revoked in March 2000.
In order to recommend a guideline for effective implementation of the recommendations of LC Gupta Committee Report, SEBI entrusted the task to another Committee , i.e. JR Verma Committee appointed by it.
SEBIs J.R.Verma Committee
SEBI has appointed a committee under the chairmanship of Dr. L. C. Gupta in November 1996 to "develop an appropriate regulatory framework for derivatives trading in India". In March 1998, the L. C. Gupta Committee (LCGC) submitted its report recommending introduction of derivatives markets in a phased manner beginning with the introduction of index futures. The SEBI Board while approving the introduction of index futures trading put up the setting up of a group to recommend measures for risk containment in the derivative market in India. Accordingly, SEBI constituted a group in June, 1998: with Prof. J.R. Varma, as Chairman. The group submitted its report in 1998. The group began by enumerating the risk containment issues that assumed importance in the Indian context while setting up an index futures market. The recommendations of the Group as covered by its report are as under: Estimation of Volatility (Clause 2.1) Several issues arise in the estimation of volatility: • • • The Volatility in the Indian market is quite high compared to developed markets. The volatility in the Indian market is not constant and is varying over time. The statistics on the volatility of the index futures markets does not exists and therefore, in the initial period, reliance has to be made on the volatility in the underlying securities market. The LC Gupta Committee (LCGC) has prescribed that no cross margining would be permitted and separate margins would be charged on the position in the futures and the underlying securities market. In the absence of cross margining, index arbitrage would be costly and therefore possibly will not be efficient.
Calendar Spreads (Clause 2.2) In developed markets, calendar spreads are essentially a play on interest rates with negligible stock market exposure. As such margins for calendar spreads are very low. In India, the calendar basis risk could be high due to the absence of efficient index arbitrage and the lack of channels for the flow of funds from the organised money market to the index future market. Trader Net Worth (Clause 2.3) Even an accurate 99% "value at risk" model would give rise to end of day mark to market losses exceeding the margin of approximately once every 6 months. Trader networth provides an additional level of safety to markets and works as a deterrent to the incidence of defaults. A member with a high networth would try harder to avoid defaults as his own networth would be at stake. Margin Collection and Enforcement (Clause 2.4) Apart from the right calculation of margin, the actual collection of margin is also of equal importance. Since initial margins can be deposited in the form of bank guarantee and securities, the risk containment issues in regard to these need has to be tackled. Clearing Corporation (Clause 2.5) The clearing corporation provides novation and becomes the counter party for every trade. In this circumstances, the credibility of the clearing corporation assumes the importance and issues of governance and transparency need to be addressed. Position Limit (Clause 2.6) It can be necessary to prescribe position limits for the market considering whole and for the individual clearing member / trading member / client. Margining System (Clause 3) - Mandating a Margin Methodology not Specific Margins (Clause 3.1.1)
The LCGC recommended that margins in the derivatives markets would be based on a 99% (VAR) approach. The group discussed ways of operationalizing this recommendation keeping in mind the issues relating to estimation of volatility discussed. It is decided that SEBI should authorise the use of a particular VAR estimation methodology but should not make compulsory a specific minimum margin level. Initial Methodology (Clause 3.1.2) The group has evaluated and approved a particular risk estimation methodology that is described in 3.2 below and discussed in further detail in Appendix 1. The derivatives exchange and clearing corporation should be authorised to start index futures trading using this methodology for fixing margins. Continuous Refining (Clause 3.1.3) The derivatives exchange and clearing corporation should be encouraged to refine this methodology continuously on the basis of further experience. Any proposal for changes in the methodology should be filed with SEBI and released to the public for comments along with detailed comparative backtesting results of the proposed methodology and the current methodology. The proposal shall specify the date from which the new methodology will become effective and this effective date shall not be less than three months after the date of filing with SEBI. At any time up to two weeks before the effective date, SEBI may instruct the derivatives exchange and clearing corporation not to implement the change, or the derivatives exchange and clearing corporation may on its own decide not to implement the change. Initial Margin Fixation Methodology (Clause 3.2) The group took on record the estimation and backtesting results provided by Prof. Varma (see Appendix 1) from his ongoing research work on value at risk calculations in Indian financial markets. The group, being satisfied with these backtesting results, recommends the following margin fixation methodology as the initial methodology for the purposes of 3.1.1 above. The exponential moving average method would be used to obtain the volatility estimate every day. Daily Changes in Margins (Clause 3.3) The group recommends that the volatility estimated at the end of the day's trading would be used in calculating margin calls at the end of the same day. This implies that during the course of trading, market participants would not know the exact margin that would apply to their position. It was agreed therefore that the volatility estimation and margin fixation methodology would be clearly made known to all market participants so that they can compute what the margin would be for any given closing level of the index. It was also agreed that the trading software would itself provide this information on a real time basis on the trading workstation screen. Margining for Calendar Spreads (Clause 3.4) The group took note of the international practice of levying very low margins on calendar spreads. A calendar spread is a position at one maturity which is hedged by an offsetting position at a different maturity: for example, a short position in the six month contract coupled with a long position in the nine month contract. The justification for low margins is that a calendar spread is not exposed to the market risk in the underlying at all. If the underlying rises, one leg of the spread loses money while the other gains money resulting in a hedged position. Standard futures pricing models state that the futures price is equal to the cash price plus a net cost of carry (interest cost reduced by dividend yield on the underlying). This means that the only risk in a calendar spread is the risk that the cost of carry might change; this is essentially an interest rate risk in a money market position. In fact, a calendar spread can be viewed as a synthetic money market position. The above example of a short position in the six month contract matched by a long position in the nine month contract can be regarded as a six month future on a three month T-bill. In developed financial markets, the cost of carry is driven by a money market interest rate and the risk in calendar spreads is very low.
In India, however, unless banks and institutions enter the calendar spread in a big way, it is possible that the cost of carry would be driven by an unorganised money market rate as in the case of the badla market. These interest rates could be highly volatile. Given the evidence that the cost of carry is not an efficient money market rate, prudence demands that the margin on calendar spreads be far higher than international practice. Moreover, the margin system should operate smoothly when a calendar spread is turned into a naked short or long position on the index either by the expiry of one of the legs or by the closing out of the position in one of the legs. The group therefore recommends that: • The margin on calendar spreads be levied at a flat rate of 0.5% per month of spread on the far month contract of the spread subject to a minimum margin of 1% and a maximum margin of 3% on the far side of the spread for spreads with legs upto 1 year apart. A spread with the two legs three months apart would thus attract a margin of 1.5% on the far month contract. The margining of calendar spreads be reviewed at the end of six months of index futures trading. A calendar spread should be treated as a naked position in the far month contract as the near month contract approaches expiry. This change should be affected in gradual steps over the last few days of trading of the near month contract. Specifically, during the last five days of trading of the near month contract, the following percentages of a calendar spread shall be treated as a naked position in the far month contract: 100% on day of expiry, 80% one day before expiry, 60% two days before expiry, 40% three days before expiry, 20% four days before expiry. The balance of the spread shall continue to be treated as a spread. This phasing in will apply both to margining and to the computation of exposure limits. If the closing out of one leg of a calendar spread causes the members' liquid net worth to fall below the minimum levels specified in 4.2 below, his terminal shall be disabled and the clearing corporation shall take steps to liquidate sufficient positions to restore the members' liquid net worth to the levels mandated in 4.2. The derivatives exchange should explore the possibility that the trading system could incorporate the ability to place a single order to buy or sell spreads without placing two separate orders for the two legs. For the purposes of the exposure limit in 4.2 (b), a calendar spread shall be regarded as an open position of one third of the mark to market value of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract in the same manner as in 3.4 (c).
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Margin Collection and Enforcement(Clause 3.5) Apart from the correct calculation of margin, the actual collection of margin is also of equal importance. The group recommends that the clearing corporation should lay down operational guidelines on collection of margin and standard guidelines for back office accounting at the clearing member and trading member level to facilitate the detection of non-compliance at each level. Transparency and Disclosure (Clause 3.6) The group recommends that the clearing corporation / clearing house shall be required to disclose the details of incidences of failures in collection of margin and / or the settlement dues at least on a quarterly basis. Failure for this purpose means a shortfall for three consecutive trading days of 50% or more of the liquid net worth of the member
SEBI - SEBI Administration
The Securities and Exchange Board of India Act, 1992 is having retrospective effect and is deemed to
have come into force on January 30, 1992. Relatively a brief act containing 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. A Board by the name of the Securities and Exchange Board of India (SEBI) was constituted under the SEBI Act to amminister its provisions. It consists of one Chairman and five members. One each from the department of Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras. The Central Government reserves the right to terminate the services of the Chairman or any member of the Board. The Board decides questions in the meeting by majority vote with the Chairman having a second or casting vote. Section 11 of the SEBI Act provides that to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures, it is the duty of the Board. It has given power to the Board to regulate the business in Stock Exchanges, register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., also to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. All the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are to register with the Board under the provisions of the Act, under Section 12 of the Sebi Act. The Board has the power to suspend or cancel such registration. The Board is bound by the directions vested by the Central Government from time to time on questions of policy and the Central Government reserves the right to supersede the Board. The Board is also obliged to submit a report to the Central Government each year, giving true and full account of its activities, policies and programmes. Any one of the aggrieved by the Board's decision is entitled to appeal to the Central Government.
Public Issue Any company or a listed company making a public issue or a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after getting observations from SEBI. The company has to open its issue within three months from the date of SEBI's observation letter. Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market. The entry norms are only for companies making a public issue (IPO or FPO) and not for listed company making a rights issue. The entry norms are as follows Entry Norm I (EN I): The company shall meet the following requirements • • • • • Net Tangible Assets of at least Rs. 3 crores for 3 full years. Distributable profits in atleast three years. Net worth of at least Rs. 1 crore in three years. If change in name, atleast 50% revenue for preceding 1 year should be from the new activity. The issue size does not exceed 5 times the pre- issue net worth.
SEBI has provided two other alternative routes to company not satisfying any of the above conditions to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, for accessing the primary Market. They are as under Entry Norm II (EN II) • • Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. OR Entry Norm III (EN III) • • The "project" is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years.
Note :- The company should also satisfy the criteria of having at least 1000 prospective allotees. The following are exempted from the ENs • • • • Private Sector Banks Public sector banks An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. Rights issue by a listed company
FAQs on Public Issue For A New Investor • • • • • • • • • Does SEBI approve the contents of the issue? Does SEBI tag make my money safe? How does SEBI ensure compliance with DIP? The Central Listing Authority's (CLA) functions have been detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14, 2003. Who decides the price of an issue? How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? Who is eligible to be a BRLM? What are the relevant regulations and where do I find them? Will SEBI answer my queries online in case of doubts and clarifications?
Does SEBI approve the contents of the issue? It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue. Does SEBI tag make my money safe? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any 'tips' or news through unofficial means. How does SEBI ensure compliance with DIP? The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the website for public comments. Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents.
With the presence of the Central Listing Authority (CLA), what would be the role of SEBI in the processing of Offer docume nts for an issue? The Central Listing Authority's (CLA) functions have been detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14, 2003. In brief, it covers processing applications for letter precedent to listing from applicants; to make recommendations to the Board on issues pertaining to the protection of the interest of the investors in securities and development and regulation of the securities market, including the listing agreements, listing conditions and disclosures to be made in offer documents; and; to undertake any other functions as may be delegated to it by the Board from time to time. SEBI as the regulator of the securities market examines all the policy matters pertaining to issues and will continue to do so even during the existence of the CLA. Since the CLA is not yet operational, the reply to this question would be updated thereafter. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues one where company and LM fix a price (called fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period. The draft offer documents are put up on the website under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up for information under the same section. Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI Mittal Court, 'A' wing, Ground Floor, 224, Nariman Point, Mumbai - 400021 on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI website under Reports/Documents section. Some LMs also make it available on their webisties for download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the same section of the website. Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue. What are the relevant regulations and where do I find them? The SEBI Manual is SEBI authorized publication that is a comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines that are related to the functioning of the Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI website under the "Legal Framework" section. The periodic updates are uploaded onto the SEBI website regularly. Will SEBI answer my queries online in case of doubts and clarifications?
The "Feedback" section on the SEBI website has a provision for the visitors to the site to ask questions on clarifications on smaller issues pertaining to the availability of information and a facility for users to provide feedback on the same. However, if the queries are legalistic and deep in nature, they are to be referred to SEBI under the SEBI (informal Guidance) Scheme, 2003.
Amendment in SEBI Guidelines As part of a series of initiatives to protect investors’ interest, the market regulator Securities and Exchange Board of India has granted in principle approval for introduction of ‘optional grading’ of public issues of those companies which are not listed with the stock exchanges [viz. Initial Public Offerings (IPOs)]. IPO grading service is provided by some credit rating agencies (CRAs), including ICRA, CRISIL, Fitch Ratings India and CARE, registered with SEBI. According to SEBI, IPO grading would not be mandatory and would be solely at the option of the issuer company. SEBI will not certify the assessment made by the grading agency The main objective of such IPO grading is to enable investors to have an independent opinion from credible entities about the equity issue of an unlisted company. Though it is optional for companies to seek an opinion, it would be mandatory for them to state the grading symbol on the offer document if they have opted to get themselves graded. However, SEBI has clearly said that the grading exercise would restrict itself to assessing the ‘fundamental business strength’ of the company (such as business prospects and financial position), and would not be an ‘investment recommendation’as such. SEBI has also said: “As the IPO grading does not take cognizance of the price of the security, it is not an investment recommendation. Rather, it is one of the inputs for the investor to aid in the decision making process. All other things remaining equal, a security with stronger fundamentals would command a higher market price”. SEBI will probably be the first regulator in the world to implement rating/grading of IPOs. Currently, only debt issues are rated ahead of offers. According to SEBI, “There are some variants of the product in other markets, for pre-sale equity reports done by equity broking houses. However, no regulator has initiated rating of IPOs in any part of the world.
IPO Grading: Conceptual Issues
It is a service intended to facilitate the assessment of equity issues offered by unlisted companies to public. The grade assigned to any individual issue may represent a relative appraisal of the ‘fundamentals’of that issue in relation to to the universe of the other listed securities in the country. Thus IPO Grading is positioned as a service that provides an independednt assessment that would proves useful as as an information and investment tool for prospective investors. The methodology of such grading is to consider five-point scale with a higher score indicating stronger fundamentals. While investment recommendations are expressed as buy, hold or sell securities and are based on a security specific comparison of its assessed ‘fundamental business strength’(such as business prospects, financial position etc.) and ‘market factors’ (liquidity, demand supply etc.) to its price, it is expressed on a five-point scale as stated earlier. In other words, it is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in India. The cost of IPO grading shall be borne from investor protection funds administered by stock exchanges or from Investor Education and Protection Fund (IEPF) administered by the Ministry of Companies Affairs. It will be finalized by SEBI for necessary procedural aspects in consultation with Stock Exchanges. IPO grading covers both internal and external aspects of a company seeking to make an IPO in general. The internal factors include competence and effectiveness of the management, profile of promoters, marketing strategies, size and growth of revenues, competitive edge, technology, operating efficiency, liquidity and financial flexibility, asset quality, accounting quality, profitability and hedging of risks. Among external factors, the key one is the industry and economic/business environment for the issuer. Here, it is important to note that internationally, the global rating agencies such as Standard & Poors and Moodys do not perform grading of IPOs at all. While Standard & Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired another rating agency Dun & Bradstreet in 2000) also does not grade IPOs as yet
Why Grading?
Sometimes a company may not know whether it is performing well or not. In such a situation getting a grading by an independednt rating agency would come in handy and may be very much valuable to companies. The IPO grading is supposed to be useful particularly for assessing the offerings of companies accessing the equity markets for the first time where there is no track record of their market performance. There is no denying the fact that grading will be helpful to the unlisted issuing companies provided CRAs prescribe a higher score indicating stronger fundamentals. As stated earlier, the grade assigned to any issue may represent a relative assessment of the ‘fundamentals’ of that issue in relation to the universe of other listed equity securities in India. This grading can help the prospective investor to make a right investment decision. Thus, grading is additional investor information and
investment assistance device to enable more realistic pricing of shares and assist investors make an informed decision. Truly speaking, if investors respond better to a graded , it would prove an incentive for promoters to opt for grading in future. Needless to mention, acquiring a high grading symbol could enable issuing companies command a better premium on their offer and Issuers having underlying strength can also project themselves in a better way to their prospective investors. There are various positive sides of an grading. The most significant factors that go in favour of grading are: (a) Professional and independent appraisal, (b) Removal of information overload, (c) impediment for weak companies, (d) improving investors’ sophistication. It is worthwhile to have a brief description of these issues so as to understand the objectives of grading a) Professional and Independent Appraisal: Grading will create awareness about the fundamentals of the company’s IPO and will provide focused company information as a key input to prospective investors that will be helpful in taking an investment decision, in a manner similar to what a credit rating is for debt investors. (b) Removal of Information Burden: Where disclosures of issues are large and complex, a service analysing and interpreting these disclosures independently and quickly will be extremely useful in cutting through the clutter. Thus, the usefulness of IPO grading would be particularly high for small investors as it will serve as a guide about the company coming out with the issue. (c) Impediment for Weak Companies: While fundamentally sound companies will gain from the market, companies whose fundamentals are not very strong will be impeded in building up speculative demand among investors. Such weak companies will need to offer pricing, which will adequately compensate investors for the risks they take. Therefore, IPO grading provides disincentives for weak companies planning to come to the market to raise easy capital. (d) Improved Investors’Sophistication: It is perceived that an independent and informed opinion on the fundamental quality of the company will bring about greater level of investor sophistication in a scientific man-ner. In fact, investors may take investment decisions in a better way on the basis of opinion of CRAs regarding grading. However, the assessment is not a recommendation to buy or not buy a stock. It is, instead, a powerful tool
to assist the investors in making up their mind about the quality of a company proposing to offer an IPO investment option.
Conclusion
The Government of India was keen to set up a system to avoid any shady promoters taking advantage of the stock market boom and raising money from the public. The grading, a onetime exercise is supposed to be an independent and unbiased opinion of the concerned agency. It would only focus on assisting the investors, particularly retail individual investors, to take an informed investment decision about IPOs before putting in money. There may be apprehension among companies proposing to come up with IPOs over the possible adverse impact on pricing in the event of a poor grade. In this connection, one may comment by saying that grading of IPOs might be a ‘tricky’ affair as it could give a false sense of security to the public. However, there is no denying the fact that SEBI has taken a pioneering role in safeguarding investors’ interest by increasing disclosure levels by entities seeking to access equity markets for funding. This has caused India to be amongst one of the more transparent and efficient capital markets in the world. Moreover, these disclosures demand fairly high levels of analytical sophistication of the reader in order to effectively achieve the goal of information dissemination. It is perceived that once the grading process picks up, companies would gradually realise the benefits of getting their issues graded , especially those that are confident of their fundamental strengths. In fact, majority of retail investors do not read the offer document and even where they do they may not fully comprehend the implications of all the disclosures made in the document. So, there is a vital need to rate equity offerings helping investors separate good floats from risky ones. On the other side, there is a need to keep in mind some important issues regarding grading: Would IPO grading shift the responsibility of bringing out good IPOs from the merchant bankers to the CRAs gradually? Would CRAs provide any assurance to the investors as regards risk and return of a particular IPO ? Will investors perceive the rating as a regulatory approval of the offering? In fact, SEBI is moving away from an approval machinery to a more transparent disclosure machinery. So, would SEBI’s approval depend on the rating outcome? What would happen if the rating is modified during or after the IPO process? Can investors sue rating agencies? What would happen if the rating is high but the subsequent market performance of the company is poor? All ratings are subjective opinions of rating agencies. Should the IPO process be dependent
on such subjective elements? Since this concept is untested anywhere in the world and is yet to be fully explored in near future, it is very hard to answer all these queries at this stage. Under such situation how would investors take right decision to buy a particular IPO through grading? However, let companies opting to rate their offerings adopt it and let one observe the market experience. In fact, time will say in a right manner whether investors’ interest will indeed be safeguarded through IPO grading in India.
doc_729577026.doc
It talks about eligibility, brokerage, margin, legal issues, public issue, entry norms, grading
IPO
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The basic objectives of the Board were identified as: • • • • to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: • • • • It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts.
SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted in november 1998. However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was then carried out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001. SEBIs L C Gupta Committee SEBI appointed L.C.Gupta Committee on 18th November 1996 to develop appropriate regulatory framework for the derivatives trading and to recommend suggestive bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Committee was also to focus on the financial derivatives and equity derivatives. The Committee submitted its report in March 1998. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations and approved the introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" recommended by the LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI circulated the contents of the Report in June 98. The LC Gupta Committee had conducted a wide market survey with contact of several entities relevant to derivatives trading like brokers, mutual funds, banks/FIs, FIIs and merchant banks. The Committee observation was that there is a widespread recognition of the need for derivatives products including Equity, Interest Rate and Currency derivatives products. However Stock Index Futures is the most preferred product followed by stock index options. Options on individual stocks is the third in the order of preference. The participants took interviews, mostly stated that their objective in derivative trading would be hedging. But there were also a few interested in derivatives dealing for speculation or dealing. Goals of Regulation - Regulatory Objectives LCGC believes that regulation should be designed to achieve specific and well-defined goals. It is inclined towards positive regulation designed to encourage healthy activity and behaviour. The Committee outlined the goals of regulation admirably well in Paragraph 3.1 of its report. The important recommendations of L.C.Gupta Committee are reproduced hereunder. Need for coordinated development To quote from the report of the Committee -"The Committee's main concern is with equity based derivatives but it has tried to examine the need for financial derivatives in a broader perspective. Financial transactions and asset-liability positions are exposed to three broad types of price risks, viz: • • "Equities "market risk", also called "systematic risk" (which cannot be diversified away because the stock market as a whole may go up or down from time to time). "Interest rate risk (as in the case of fixed-income securities, like treasury bond holdings, whose market price could fall heavily if interest rates shot up), and
•
"Exchange rate risk (where the position involves a foreign currency, as in the case of imports, exports, foreign loans or investments).
"The above classification of price risks explains the emergence of (a) equity futures, (b) interest rate futures and (c) currency futures, respectively. Equity futures have been the last to emerge. "The recent report of the RBI-appointed Committee on Capital Account Convertibility (Tarapore Committee) has expressed the view that "time is ripe for introduction of futures in currencies and interest rates to facilitate various users to have access to a wide spectrum of cost-efficient hedge mechanism" (p.24). In the same context, the Tarapore Committee has also opined that "a system of trading in futures ... is more transparent and cost-efficient than the existing system (of forward contracts)". There are inter-connections among the various kinds of financial futures, mentioned above, because the various financial markets are closely inter-linked, as the recent financial market turmoil in East and South-East Asian countries has shown. The basic principles underlying the running of futures markets and their regulation are the same. Having a common trading infrastructure will have important advantages. The Committee, therefore, feels that the attempt should be to develop an integrated market structure. SEBI-RBI coordination mechanism "As all the three types of financial derivatives are set to emerge in India in the near future, it is desirable that such development be coordinated. The Committee recommends that a formal mechanism be established for such coordination between SEBI and RBI in respect of all financial derivatives markets. This will help to avoid the problem of overlapping jurisdictions." Cash and Futures Market Relationship The Committee felt that the operations of the cash market, on which the derivatives market will be based, needed improvement in many respects. It therefore suggested improvements to the Cash Market. Derivatives Exchanges The Committee strongly favoured the introduction of financial derivatives to facilitate hedging in a most cost-efficient way against market risk. There is a need for equity derivatives, interest rate derivatives and currency derivatives. There should be phased introduction of derivatives producs. To start with, index futures to be introduced, which should be followed by options on index and later options on stocks. The derivative trading should take place on a separate segment of the existing stock exchanges with an independent governing council where the number of trading members should be limited to 40 percent of the total number. Common Governing Council and Governing Board members not allowed. The Chairman of the governing council should not be permitted to trade (broking/dealing business) on any of the stock exchanges during his term. Trading to be based on On-line screen trading with disaster recovery site. Per half hour capacity should be 4-5 times the anticipated peak load. Percentage of broker-members in the council to be prescribed by SEBI. Other recommendations of the Committee about the structure of Derivative Exchanges are as under: The settlement of derivatives to be through an independent clearing corporation/clearing house, which should become counter party for all trades or alternatively guarantee the settlement of all trades. The clearing corporation to have adequate risk containment measures and to collect margins through EFT. The derivative exchange to have both on-line trading and surveillance systems. It should disseminate trade and price information on real time basis through two information vending net works. It should inspect 100 percent of members every year. The segment can start with a minimum of 50 members. The Committee recommended separate membership for derivatives segment. Members of equity segment cannot automatically become members of derivative segment. Provision for arbitration and investor grievances cells to be set up in four regions. Provision of adequate inspection capability and all members to be inspected. Regulatory framework Regulatory control should envisage modern systems for fool-proof and fail-proof regulation.
Regulatory framework for derivatives trading envisaged two-level regulation i.e. exchange-level and SEBI-level, with considerable emphasis on self-regulatory competence of derivative exchanges under the overall supervision and guidance of SEBI. There will be complete segregation of client money at the level of trading /clearing member and even at the level of clearing corporation. Other recommendations are as under: Regulatory Role of SEBI SEBI will approve rules, bye-laws and regulations. New derivative contracts to be approved by SEBI. Derivative exchanges to provide full details of proposed contract, like - economic purposes of the contract;likely contribution to the market's development; safeguards incorporated for investor protection and fair trading. Specifications Regarding Trading Stock Exchanges to stipulate in advance trading days and hours. Each contract to have predetermined expiration date and time. Contract expiration period may not exceed 12 months. The last trading day of the trading cycle to be stipulated in advance. Membership Eligibility Criteria The trading and clearing member will have stringent eligibility conditions. The Committee recommended for separate clearing and non-clearing members. There should be separate registration with SEBI in addition to registration with the stock exchange. At least two persons should have passed the certification program approved by SEBI. A higher capital adequacy for Derivatives segment recommended than prescribed for cash market. The clearing members should deposit minimum Rs. 50 lakh with the clearing corporation and should have a net worth of Rs. 3 crore. A higher deposit proposed for Option writers. Clearing Corporation The Clearing System to be totally restructured. There should be no trading interests on board of the CC. The maximum exposure limit to be liked the deposit limit. To make the clearing system effective the Committee stressed stipulation of Initial and mark-to-market margins. Extent of Margin prescribed to co-relate to the level of volatility of particular Scrips traded. The Committee therefore recommended margins based on value at risk - 99% confidence (The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The concept is identified as "Worst Scenario Loss"). It did not favour the system of Cross-margining (This is a method of calculating margin after taking into account combined positions in futures, options, cash market etc. Hence, the total margin requirement reduces due to cross-hedges). Since margins to be adjusted frequently based on market volatility margin payments to be remitted through EFT (Electronic Funds Transfer). To prevent brokers who fail/default to provide/restore adequate margin from trading further the stock exchange must have the power/facility to disable the defaulting member from further trading. Brokers/sub-brokers also to collect margin collection from clients. Exposure limits to be on gross basis. Own/clients margin to be segregated. No set off permitted. Trading to be clearly indicated as own/clients and opening/closing out. In case of default, only own margin can be set off against members' dues and the CC should promptly transfer client's margin in separate account. CC to close out all open positions at its option. CC can also ask members to close out excess positions or it may itself close out such positions. CC may however permit special margins on members. It can withhold margin or demand additional margin. CC may prescribed maximum long/short positions by members or exposure limit in quantity / value / % of base capital. Mark to Market and Settlement There should the system of daily settlement of futures contracts. Similarly the closing price of futures to be settled on daily basis. The final settlement price to be as per the closing price of underlying security. Sales Practices
• • •
Risk disclosure document with each client mandatory Sales personnel to pass certification exam Specific authorisation from client's board of directors/trustees
Trading Parameters • • • • • • • Each order - buy/sell and open/close Unique order identification number Regular market lot size, tick size Gross exposure limits to be specified Price bands for each derivative contract Maximum permissible open position Off line order entry permitted
Brokerage • • • Prices on the system shall be exclusive of brokerage Maximum brokerage rates shall be prescribed by the exchange Brokerage to be separately indicated in the contract note
Margins From Clients • • • • Margins to be collected from all clients/trading members Daily margins to be further collected Right of clearing member to close out positions of clients/TMs not paying daily margins Losses if any to be charged to clients/TMs and adjusted against margins
Other Recommendations • • • • Removal of the regulatory prohibition on the use of derivatives by mutual funds while making the trustees responsible to restrict the use of derivatives by mutual funds only to hedging and portfolio balancing and not for speculation. Creation of derivatives Cell, a derivatives Advisory Committee, and Economic Research Wing by SEBI. Declaration of derivatives as securities under section 2(h)(iia) of the SCRA and suitable amendment in the notification issued by the Central Government in June 1969 under section 16 of the SCRA Consequent to the committee's recommendations the following legal amendments were carried out:
Legal Amendments • • • Securities Contract Regulation Act Derivatives contract declared as a 'security' in Dec 1999 Notification in June 1969 under section 16 of SCRA banning forward trading revoked in March 2000.
In order to recommend a guideline for effective implementation of the recommendations of LC Gupta Committee Report, SEBI entrusted the task to another Committee , i.e. JR Verma Committee appointed by it.
SEBIs J.R.Verma Committee
SEBI has appointed a committee under the chairmanship of Dr. L. C. Gupta in November 1996 to "develop an appropriate regulatory framework for derivatives trading in India". In March 1998, the L. C. Gupta Committee (LCGC) submitted its report recommending introduction of derivatives markets in a phased manner beginning with the introduction of index futures. The SEBI Board while approving the introduction of index futures trading put up the setting up of a group to recommend measures for risk containment in the derivative market in India. Accordingly, SEBI constituted a group in June, 1998: with Prof. J.R. Varma, as Chairman. The group submitted its report in 1998. The group began by enumerating the risk containment issues that assumed importance in the Indian context while setting up an index futures market. The recommendations of the Group as covered by its report are as under: Estimation of Volatility (Clause 2.1) Several issues arise in the estimation of volatility: • • • The Volatility in the Indian market is quite high compared to developed markets. The volatility in the Indian market is not constant and is varying over time. The statistics on the volatility of the index futures markets does not exists and therefore, in the initial period, reliance has to be made on the volatility in the underlying securities market. The LC Gupta Committee (LCGC) has prescribed that no cross margining would be permitted and separate margins would be charged on the position in the futures and the underlying securities market. In the absence of cross margining, index arbitrage would be costly and therefore possibly will not be efficient.
Calendar Spreads (Clause 2.2) In developed markets, calendar spreads are essentially a play on interest rates with negligible stock market exposure. As such margins for calendar spreads are very low. In India, the calendar basis risk could be high due to the absence of efficient index arbitrage and the lack of channels for the flow of funds from the organised money market to the index future market. Trader Net Worth (Clause 2.3) Even an accurate 99% "value at risk" model would give rise to end of day mark to market losses exceeding the margin of approximately once every 6 months. Trader networth provides an additional level of safety to markets and works as a deterrent to the incidence of defaults. A member with a high networth would try harder to avoid defaults as his own networth would be at stake. Margin Collection and Enforcement (Clause 2.4) Apart from the right calculation of margin, the actual collection of margin is also of equal importance. Since initial margins can be deposited in the form of bank guarantee and securities, the risk containment issues in regard to these need has to be tackled. Clearing Corporation (Clause 2.5) The clearing corporation provides novation and becomes the counter party for every trade. In this circumstances, the credibility of the clearing corporation assumes the importance and issues of governance and transparency need to be addressed. Position Limit (Clause 2.6) It can be necessary to prescribe position limits for the market considering whole and for the individual clearing member / trading member / client. Margining System (Clause 3) - Mandating a Margin Methodology not Specific Margins (Clause 3.1.1)
The LCGC recommended that margins in the derivatives markets would be based on a 99% (VAR) approach. The group discussed ways of operationalizing this recommendation keeping in mind the issues relating to estimation of volatility discussed. It is decided that SEBI should authorise the use of a particular VAR estimation methodology but should not make compulsory a specific minimum margin level. Initial Methodology (Clause 3.1.2) The group has evaluated and approved a particular risk estimation methodology that is described in 3.2 below and discussed in further detail in Appendix 1. The derivatives exchange and clearing corporation should be authorised to start index futures trading using this methodology for fixing margins. Continuous Refining (Clause 3.1.3) The derivatives exchange and clearing corporation should be encouraged to refine this methodology continuously on the basis of further experience. Any proposal for changes in the methodology should be filed with SEBI and released to the public for comments along with detailed comparative backtesting results of the proposed methodology and the current methodology. The proposal shall specify the date from which the new methodology will become effective and this effective date shall not be less than three months after the date of filing with SEBI. At any time up to two weeks before the effective date, SEBI may instruct the derivatives exchange and clearing corporation not to implement the change, or the derivatives exchange and clearing corporation may on its own decide not to implement the change. Initial Margin Fixation Methodology (Clause 3.2) The group took on record the estimation and backtesting results provided by Prof. Varma (see Appendix 1) from his ongoing research work on value at risk calculations in Indian financial markets. The group, being satisfied with these backtesting results, recommends the following margin fixation methodology as the initial methodology for the purposes of 3.1.1 above. The exponential moving average method would be used to obtain the volatility estimate every day. Daily Changes in Margins (Clause 3.3) The group recommends that the volatility estimated at the end of the day's trading would be used in calculating margin calls at the end of the same day. This implies that during the course of trading, market participants would not know the exact margin that would apply to their position. It was agreed therefore that the volatility estimation and margin fixation methodology would be clearly made known to all market participants so that they can compute what the margin would be for any given closing level of the index. It was also agreed that the trading software would itself provide this information on a real time basis on the trading workstation screen. Margining for Calendar Spreads (Clause 3.4) The group took note of the international practice of levying very low margins on calendar spreads. A calendar spread is a position at one maturity which is hedged by an offsetting position at a different maturity: for example, a short position in the six month contract coupled with a long position in the nine month contract. The justification for low margins is that a calendar spread is not exposed to the market risk in the underlying at all. If the underlying rises, one leg of the spread loses money while the other gains money resulting in a hedged position. Standard futures pricing models state that the futures price is equal to the cash price plus a net cost of carry (interest cost reduced by dividend yield on the underlying). This means that the only risk in a calendar spread is the risk that the cost of carry might change; this is essentially an interest rate risk in a money market position. In fact, a calendar spread can be viewed as a synthetic money market position. The above example of a short position in the six month contract matched by a long position in the nine month contract can be regarded as a six month future on a three month T-bill. In developed financial markets, the cost of carry is driven by a money market interest rate and the risk in calendar spreads is very low.
In India, however, unless banks and institutions enter the calendar spread in a big way, it is possible that the cost of carry would be driven by an unorganised money market rate as in the case of the badla market. These interest rates could be highly volatile. Given the evidence that the cost of carry is not an efficient money market rate, prudence demands that the margin on calendar spreads be far higher than international practice. Moreover, the margin system should operate smoothly when a calendar spread is turned into a naked short or long position on the index either by the expiry of one of the legs or by the closing out of the position in one of the legs. The group therefore recommends that: • The margin on calendar spreads be levied at a flat rate of 0.5% per month of spread on the far month contract of the spread subject to a minimum margin of 1% and a maximum margin of 3% on the far side of the spread for spreads with legs upto 1 year apart. A spread with the two legs three months apart would thus attract a margin of 1.5% on the far month contract. The margining of calendar spreads be reviewed at the end of six months of index futures trading. A calendar spread should be treated as a naked position in the far month contract as the near month contract approaches expiry. This change should be affected in gradual steps over the last few days of trading of the near month contract. Specifically, during the last five days of trading of the near month contract, the following percentages of a calendar spread shall be treated as a naked position in the far month contract: 100% on day of expiry, 80% one day before expiry, 60% two days before expiry, 40% three days before expiry, 20% four days before expiry. The balance of the spread shall continue to be treated as a spread. This phasing in will apply both to margining and to the computation of exposure limits. If the closing out of one leg of a calendar spread causes the members' liquid net worth to fall below the minimum levels specified in 4.2 below, his terminal shall be disabled and the clearing corporation shall take steps to liquidate sufficient positions to restore the members' liquid net worth to the levels mandated in 4.2. The derivatives exchange should explore the possibility that the trading system could incorporate the ability to place a single order to buy or sell spreads without placing two separate orders for the two legs. For the purposes of the exposure limit in 4.2 (b), a calendar spread shall be regarded as an open position of one third of the mark to market value of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract in the same manner as in 3.4 (c).
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Margin Collection and Enforcement(Clause 3.5) Apart from the correct calculation of margin, the actual collection of margin is also of equal importance. The group recommends that the clearing corporation should lay down operational guidelines on collection of margin and standard guidelines for back office accounting at the clearing member and trading member level to facilitate the detection of non-compliance at each level. Transparency and Disclosure (Clause 3.6) The group recommends that the clearing corporation / clearing house shall be required to disclose the details of incidences of failures in collection of margin and / or the settlement dues at least on a quarterly basis. Failure for this purpose means a shortfall for three consecutive trading days of 50% or more of the liquid net worth of the member
SEBI - SEBI Administration
The Securities and Exchange Board of India Act, 1992 is having retrospective effect and is deemed to
have come into force on January 30, 1992. Relatively a brief act containing 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. A Board by the name of the Securities and Exchange Board of India (SEBI) was constituted under the SEBI Act to amminister its provisions. It consists of one Chairman and five members. One each from the department of Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras. The Central Government reserves the right to terminate the services of the Chairman or any member of the Board. The Board decides questions in the meeting by majority vote with the Chairman having a second or casting vote. Section 11 of the SEBI Act provides that to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures, it is the duty of the Board. It has given power to the Board to regulate the business in Stock Exchanges, register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., also to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. All the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are to register with the Board under the provisions of the Act, under Section 12 of the Sebi Act. The Board has the power to suspend or cancel such registration. The Board is bound by the directions vested by the Central Government from time to time on questions of policy and the Central Government reserves the right to supersede the Board. The Board is also obliged to submit a report to the Central Government each year, giving true and full account of its activities, policies and programmes. Any one of the aggrieved by the Board's decision is entitled to appeal to the Central Government.
Public Issue Any company or a listed company making a public issue or a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after getting observations from SEBI. The company has to open its issue within three months from the date of SEBI's observation letter. Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market. The entry norms are only for companies making a public issue (IPO or FPO) and not for listed company making a rights issue. The entry norms are as follows Entry Norm I (EN I): The company shall meet the following requirements • • • • • Net Tangible Assets of at least Rs. 3 crores for 3 full years. Distributable profits in atleast three years. Net worth of at least Rs. 1 crore in three years. If change in name, atleast 50% revenue for preceding 1 year should be from the new activity. The issue size does not exceed 5 times the pre- issue net worth.
SEBI has provided two other alternative routes to company not satisfying any of the above conditions to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, for accessing the primary Market. They are as under Entry Norm II (EN II) • • Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. OR Entry Norm III (EN III) • • The "project" is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years.
Note :- The company should also satisfy the criteria of having at least 1000 prospective allotees. The following are exempted from the ENs • • • • Private Sector Banks Public sector banks An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. Rights issue by a listed company
FAQs on Public Issue For A New Investor • • • • • • • • • Does SEBI approve the contents of the issue? Does SEBI tag make my money safe? How does SEBI ensure compliance with DIP? The Central Listing Authority's (CLA) functions have been detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14, 2003. Who decides the price of an issue? How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? Who is eligible to be a BRLM? What are the relevant regulations and where do I find them? Will SEBI answer my queries online in case of doubts and clarifications?
Does SEBI approve the contents of the issue? It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue. Does SEBI tag make my money safe? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against any 'tips' or news through unofficial means. How does SEBI ensure compliance with DIP? The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the website for public comments. Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents.
With the presence of the Central Listing Authority (CLA), what would be the role of SEBI in the processing of Offer docume nts for an issue? The Central Listing Authority's (CLA) functions have been detailed under Regulation 8 of SEBI (Central Listing Authority) Regulations, 2003 (CLA Regulations) issued on August 21, 2003 and amended up to October 14, 2003. In brief, it covers processing applications for letter precedent to listing from applicants; to make recommendations to the Board on issues pertaining to the protection of the interest of the investors in securities and development and regulation of the securities market, including the listing agreements, listing conditions and disclosures to be made in offer documents; and; to undertake any other functions as may be delegated to it by the Board from time to time. SEBI as the regulator of the securities market examines all the policy matters pertaining to issues and will continue to do so even during the existence of the CLA. Since the CLA is not yet operational, the reply to this question would be updated thereafter. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues one where company and LM fix a price (called fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period. The draft offer documents are put up on the website under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up for information under the same section. Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI Mittal Court, 'A' wing, Ground Floor, 224, Nariman Point, Mumbai - 400021 on a payment of Rs.100 or from SES, LMs etc. The soft copies can be downloaded from the SEBI website under Reports/Documents section. Some LMs also make it available on their webisties for download. The final offer documents that are filed with SEBI/ROC can also be downloaded from the same section of the website. Who is eligible to be a BRLM? A Merchant banker possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager to an issue. What are the relevant regulations and where do I find them? The SEBI Manual is SEBI authorized publication that is a comprehensive databank of all relevant Acts, Rules, Regulations and Guidelines that are related to the functioning of the Board. The details pertaining to the Acts, Rules, Regulations, Guidelines and Circulars are placed on the SEBI website under the "Legal Framework" section. The periodic updates are uploaded onto the SEBI website regularly. Will SEBI answer my queries online in case of doubts and clarifications?
The "Feedback" section on the SEBI website has a provision for the visitors to the site to ask questions on clarifications on smaller issues pertaining to the availability of information and a facility for users to provide feedback on the same. However, if the queries are legalistic and deep in nature, they are to be referred to SEBI under the SEBI (informal Guidance) Scheme, 2003.
Amendment in SEBI Guidelines As part of a series of initiatives to protect investors’ interest, the market regulator Securities and Exchange Board of India has granted in principle approval for introduction of ‘optional grading’ of public issues of those companies which are not listed with the stock exchanges [viz. Initial Public Offerings (IPOs)]. IPO grading service is provided by some credit rating agencies (CRAs), including ICRA, CRISIL, Fitch Ratings India and CARE, registered with SEBI. According to SEBI, IPO grading would not be mandatory and would be solely at the option of the issuer company. SEBI will not certify the assessment made by the grading agency The main objective of such IPO grading is to enable investors to have an independent opinion from credible entities about the equity issue of an unlisted company. Though it is optional for companies to seek an opinion, it would be mandatory for them to state the grading symbol on the offer document if they have opted to get themselves graded. However, SEBI has clearly said that the grading exercise would restrict itself to assessing the ‘fundamental business strength’ of the company (such as business prospects and financial position), and would not be an ‘investment recommendation’as such. SEBI has also said: “As the IPO grading does not take cognizance of the price of the security, it is not an investment recommendation. Rather, it is one of the inputs for the investor to aid in the decision making process. All other things remaining equal, a security with stronger fundamentals would command a higher market price”. SEBI will probably be the first regulator in the world to implement rating/grading of IPOs. Currently, only debt issues are rated ahead of offers. According to SEBI, “There are some variants of the product in other markets, for pre-sale equity reports done by equity broking houses. However, no regulator has initiated rating of IPOs in any part of the world.
IPO Grading: Conceptual Issues
It is a service intended to facilitate the assessment of equity issues offered by unlisted companies to public. The grade assigned to any individual issue may represent a relative appraisal of the ‘fundamentals’of that issue in relation to to the universe of the other listed securities in the country. Thus IPO Grading is positioned as a service that provides an independednt assessment that would proves useful as as an information and investment tool for prospective investors. The methodology of such grading is to consider five-point scale with a higher score indicating stronger fundamentals. While investment recommendations are expressed as buy, hold or sell securities and are based on a security specific comparison of its assessed ‘fundamental business strength’(such as business prospects, financial position etc.) and ‘market factors’ (liquidity, demand supply etc.) to its price, it is expressed on a five-point scale as stated earlier. In other words, it is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in India. The cost of IPO grading shall be borne from investor protection funds administered by stock exchanges or from Investor Education and Protection Fund (IEPF) administered by the Ministry of Companies Affairs. It will be finalized by SEBI for necessary procedural aspects in consultation with Stock Exchanges. IPO grading covers both internal and external aspects of a company seeking to make an IPO in general. The internal factors include competence and effectiveness of the management, profile of promoters, marketing strategies, size and growth of revenues, competitive edge, technology, operating efficiency, liquidity and financial flexibility, asset quality, accounting quality, profitability and hedging of risks. Among external factors, the key one is the industry and economic/business environment for the issuer. Here, it is important to note that internationally, the global rating agencies such as Standard & Poors and Moodys do not perform grading of IPOs at all. While Standard & Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired another rating agency Dun & Bradstreet in 2000) also does not grade IPOs as yet
Why Grading?
Sometimes a company may not know whether it is performing well or not. In such a situation getting a grading by an independednt rating agency would come in handy and may be very much valuable to companies. The IPO grading is supposed to be useful particularly for assessing the offerings of companies accessing the equity markets for the first time where there is no track record of their market performance. There is no denying the fact that grading will be helpful to the unlisted issuing companies provided CRAs prescribe a higher score indicating stronger fundamentals. As stated earlier, the grade assigned to any issue may represent a relative assessment of the ‘fundamentals’ of that issue in relation to the universe of other listed equity securities in India. This grading can help the prospective investor to make a right investment decision. Thus, grading is additional investor information and
investment assistance device to enable more realistic pricing of shares and assist investors make an informed decision. Truly speaking, if investors respond better to a graded , it would prove an incentive for promoters to opt for grading in future. Needless to mention, acquiring a high grading symbol could enable issuing companies command a better premium on their offer and Issuers having underlying strength can also project themselves in a better way to their prospective investors. There are various positive sides of an grading. The most significant factors that go in favour of grading are: (a) Professional and independent appraisal, (b) Removal of information overload, (c) impediment for weak companies, (d) improving investors’ sophistication. It is worthwhile to have a brief description of these issues so as to understand the objectives of grading a) Professional and Independent Appraisal: Grading will create awareness about the fundamentals of the company’s IPO and will provide focused company information as a key input to prospective investors that will be helpful in taking an investment decision, in a manner similar to what a credit rating is for debt investors. (b) Removal of Information Burden: Where disclosures of issues are large and complex, a service analysing and interpreting these disclosures independently and quickly will be extremely useful in cutting through the clutter. Thus, the usefulness of IPO grading would be particularly high for small investors as it will serve as a guide about the company coming out with the issue. (c) Impediment for Weak Companies: While fundamentally sound companies will gain from the market, companies whose fundamentals are not very strong will be impeded in building up speculative demand among investors. Such weak companies will need to offer pricing, which will adequately compensate investors for the risks they take. Therefore, IPO grading provides disincentives for weak companies planning to come to the market to raise easy capital. (d) Improved Investors’Sophistication: It is perceived that an independent and informed opinion on the fundamental quality of the company will bring about greater level of investor sophistication in a scientific man-ner. In fact, investors may take investment decisions in a better way on the basis of opinion of CRAs regarding grading. However, the assessment is not a recommendation to buy or not buy a stock. It is, instead, a powerful tool
to assist the investors in making up their mind about the quality of a company proposing to offer an IPO investment option.
Conclusion
The Government of India was keen to set up a system to avoid any shady promoters taking advantage of the stock market boom and raising money from the public. The grading, a onetime exercise is supposed to be an independent and unbiased opinion of the concerned agency. It would only focus on assisting the investors, particularly retail individual investors, to take an informed investment decision about IPOs before putting in money. There may be apprehension among companies proposing to come up with IPOs over the possible adverse impact on pricing in the event of a poor grade. In this connection, one may comment by saying that grading of IPOs might be a ‘tricky’ affair as it could give a false sense of security to the public. However, there is no denying the fact that SEBI has taken a pioneering role in safeguarding investors’ interest by increasing disclosure levels by entities seeking to access equity markets for funding. This has caused India to be amongst one of the more transparent and efficient capital markets in the world. Moreover, these disclosures demand fairly high levels of analytical sophistication of the reader in order to effectively achieve the goal of information dissemination. It is perceived that once the grading process picks up, companies would gradually realise the benefits of getting their issues graded , especially those that are confident of their fundamental strengths. In fact, majority of retail investors do not read the offer document and even where they do they may not fully comprehend the implications of all the disclosures made in the document. So, there is a vital need to rate equity offerings helping investors separate good floats from risky ones. On the other side, there is a need to keep in mind some important issues regarding grading: Would IPO grading shift the responsibility of bringing out good IPOs from the merchant bankers to the CRAs gradually? Would CRAs provide any assurance to the investors as regards risk and return of a particular IPO ? Will investors perceive the rating as a regulatory approval of the offering? In fact, SEBI is moving away from an approval machinery to a more transparent disclosure machinery. So, would SEBI’s approval depend on the rating outcome? What would happen if the rating is modified during or after the IPO process? Can investors sue rating agencies? What would happen if the rating is high but the subsequent market performance of the company is poor? All ratings are subjective opinions of rating agencies. Should the IPO process be dependent
on such subjective elements? Since this concept is untested anywhere in the world and is yet to be fully explored in near future, it is very hard to answer all these queries at this stage. Under such situation how would investors take right decision to buy a particular IPO through grading? However, let companies opting to rate their offerings adopt it and let one observe the market experience. In fact, time will say in a right manner whether investors’ interest will indeed be safeguarded through IPO grading in India.
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