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What is the Secondary Market and Role of Market Participants?

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What is the Secondary Market and Role of Market Participants?

What is the Secondary Market and Role of Market Participants?

Deepak Sharma 26 Sep 2020

What is the Secondary Market and Role of Market Participants?

 

How does the Public Issue of Debt Securities take place?

  • The issue of debt securities is regulated by the provisions of the Companies Act and SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

  • A public issue of debt securities is possible by a company registered as a public limited company under the Companies Act, 2013. 

  • An unlisted company,  a company that has not made an initial public offer of its shares and listed the shares on a stock exchange, can still make a public issue of debentures and list them on a stock exchange.

  • The company files an offer document with SEBI and the Registrar of Companies which gives all the material information of the issue. 

 

  1. Dematerialization

  2. Coupon Rate

  3. Debenture Trustees

  4. Debenture Redemption Reserve

  5. Creation of Security

 

What are the other methods of Issuing Securities other than Public issue?

Private Placements in Equity and Debt

 

  • Private placement of securities is an offer made by a company to a select group of investors such as financial institutions, banks, and mutual funds. The advantage of the private placement as a way to issue securities and raise funds comes from the following:

  • Investors are better informed and there are fewer regulatory compliances in issuances to them.

  • Issuing securities are less time consuming and cost-efficient since there are fewer procedures to be followed.

Qualified Institutional Placement

  • Qualified institutional placement (QIP) is a private placement of shares made by a listed company to certain identified categories of investors known as Qualified Institutional Buyers (QIBs). 

  • To be eligible to make such placement the shares of the company should have been listed on the stock exchange for a period at least one year before the notice of such an issue is given. 

  • QIBs include financial institutions, mutual funds, and banks among others.

Institutional Placement Program (IPP)

 

  • An Institutional Placement Program is the issuance of fresh shares by a company or an offer for sale by a promoter to QIBs to meet the minimum shareholding requirement specified by stock exchanges in their listing requirements.

  • The company will specify a floor price or a price band for the bidding at least one day before the offer opens. 

  • The issue will remain open for a minimum period of one day and a maximum of two days.

 

Issue of Specified Securities by Small and Medium Enterprises (SME)

  • A small and medium enterprise is defined as an issuer whose post-issue face value capital does not exceed Rs.10 crore and issuers whose capital exceeds Rs. 10 crores but not Rs. 25 crores.

  • The minimum application size shall not be less than Rs. 1 lakh.

  • A company whose shares are listed on a stock exchange and whose post-issue face value capital does not exceed Rs.25 crores may migrate the shares to an SME exchange after passing a special resolution to this effect.

 

What are the Functions of Secondary Markets?

  • Liquidity - Secondary markets provide liquidity and marketability to existing securities. Investors can exit or enter any listed security by transacting in the secondary markets.

  • Price Discovery - Secondary markets enable price discovery of traded securities. The price at which investors undertake to buy or sell transactions reflects the individual assessment of investors about the fundamental worth of the security. The continuous flow of price data allows investors to identify the market price of equity shares. 

  • Information Signaling: This information-signaling function of prices works like a continuous monitor of issuing companies, and in turn forces issuers to improve profitability and performance. Efficient markets are those in which market prices of securities reflect all available information about the security.

  • Indicating Economic Activity: Secondary market trading data is used to generate benchmark indices that are widely tracked in the country. Movements in the index represent the overall market direction. 

  • The market for Corporate Control: Stock markets function as markets for efficient governance by facilitating changes in corporate control.  Potential acquirers could acquire a significant portion of the target firm’s shares in the market, take over its board of directors, and improve its market value by providing better governance.

 

How is the Secondary Market Structure and Participants of it?

The secondary market consists of the following participants:

  • Stock exchanges – entities that provide infrastructure for trading in securities.

  • Investors – individuals and institutions that buy and sell securities

  • Issuers - companies that issue securities

  • Financial intermediaries – firms that facilitate secondary market activity

  • Regulator – authority that oversees activities of all participants in the market

 

  • Stock Exchange:

The core component of any secondary market is the stock exchange. The stock exchange provides a platform for investors to buy and sell securities from each other in an organized and regulated manner. The two leading stock exchanges in India are the BSE and the NSE.

  • Investors

 If investors buy and sell shares among themselves, such trades are called “off-market” and do not enjoy the benefits of regulatory and redressal provisions of the law. In order to get a competitive price and liquid markets in which transactions can be completed efficiently, investors come to the stock exchange through their brokers.

 

  • Issuers

Issuers are companies and other entities that seek admission for their securities to be listed on the stock exchange. Equity shares, corporate bonds, and debentures as well as securities issued by the government are admitted to trading on stock exchanges. 

  • Secondary market transactions have three distinct phases: trading, clearing, and settlement.

  • The clearing is the process of identifying what is owed to the buyer and seller in a trading transaction and settlement is the mechanism of settling the obligations of counterparties in a trade.

  • Clearing corporation: The National Securities Clearing Corporation Ltd (NSCCL) is the clearinghouse for trades done on the NSE, the Indian Clearing Corporation Ltd (ICCL) is the clearinghouse for BSE and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL) is the clearinghouse for MCX-SX.

  • Depositories and Depository Participants: It should be held in an electronic or dematerialized form. 

  • National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are the two depositories in India. Investors have to open Demat accounts with depository participants (DPs), who are banks, brokers or other institutional providers of this service, to be able to trade in their securities.

  • Custodians

Custodians are institutional intermediaries, who are authorized to hold funds and securities on behalf of large institutional investors such as banks, insurance companies, mutual funds, and foreign institutional investors (FIIs).

  • Regulation

Secondary markets are regulated under the provisions of the Securities Contract Regulations Act, 1956 and SCR (Rules), 1957. SEBI is authorized by law to implement the provisions of this act and its rules. It has empowered stock exchanges to administer portions of the regulation pertaining to trading, membership, and listing.

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