Terms commonly used with reference to capital market

There are several terms which are commonly used with reference to capital market. Several such terms have already been discussed in the previous articles. Understanding of following terms (given in alphabetical order) will help the readers in better grasping the structure and trading system in the capital market in India :

Arbitrage: Arbitrage refers to taking advantage of price differential in a particular security on to different stock exchanges. An investor/speculator can sell at one stock exchange and buy the same at lower price at other stock exchange. The difference in prices is the profit of the investor/speculator.

Categories of Shares at BSE: At the Mumbai Stock Exchange, the shares have been categorised in different categories  such as A, B1, B2, S, T, TS and Z. Categories A , B1 and B2 depend upon the volume and turnover of different shares on the BSE. S group is called BSE Indonext, which provide a nationwide trading platform for the small and medium enterprises already listed with the BSE and regional stock exchanges. As required by SEBI, category T, referring to Trade to Trade, shares are those of which the transactions must result in the delivery. In other words, the squirring off of the transaction is not allowed. An investor buying or selling a T-group share must effect a delivery. It cannot be settled by a counter transaction. TS group is trade to trade segment of BSE Indonext. Z group refers to the companies which have failed to comply with the listing requirements and/or have failed to resolving investors complaints.

Circuit Breakers: Prices of shares fluctuate regularly and sometimes there is a great volatility in the share prices. In order to check and control the excessive fluctuations in prices. SEBI has introduced a circuit breaker system wherein the trading in shares of a particular company automatically stops as soon as the prices of that share show a fluctuation beyond a prescribed limit on a particular day. The circuit breakers are also applicable to trading of all equities if the NIFTY or Sensex shows a fluctuation beyond a prescribed limit on a particular day. SEBI has provided that in case, there is a fluctuation of 10% in the index (Sensex  r Nifty) on any day, the circuit breakers will apply automatically and the trading in all equity shares would halt for one hour. If the prices fluctuate another 5% after reopening, the trading will again halt to provide the market an opportunity to cool down. The circuit breakers were applied for 10% and then for another 5% downfall in the Sensex and Nifty on May 17, 2004 for the first time in India. on that day, the Sensex hit a low of 4516 (down 10.9% from the previous close), and after cooling off period of one hour, touched the low of 4283 (down another 5%), and the trading in equities was freezed for another two hours. Also, on May 22, 2006,the Sensex fell by 10.10% and the trading was halted by SEBI for one hour to let the market cool down.

Corporate Governance: Under Clause 49 of the Listing Agreement, all listed companies are required to present, in a separate section, a report on the corporate Governance (CG) of the company. The following information is to be provided in the report :

  • A brief statement on company’s philosophy or code of governance.
  • Composition of Board of Directors. Attendance of each director at the Board or Board Committee Meeting. Number of Board Meetings held during the year.
  • Brief terms of reference, composition, meetings and attendance at Audit committee during the Year.
  • Brief description, composition of remuneration to Directors.
  • Brief description of the shareholder’s committee, Number of complaints pending.
  • Details of General Body Meeting and resolutions passed there.
  • Disclosure of Related Party Transactions, Details of non-compliance of SEBI Rules/Regulations or other statutory obligations.
  • Means of communication of quarterly and half-yearly results.
  • General shareholder information in respect of : Date and venue of AGM, Date of book closing and Dividend payment, stock code and market price data for each month of last financial year, Registrar, Transfer Agents and share transfer system. Dematerialisation information, outstanding ADR/GDRs, Performance of market price of share in comparison with BSE Sensex, Crisil Index, etc.

Custodian:  A custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client. The custodian also provides incidental services such as maintaining the accounts of securities of the client, collecting the benefits or rights accruing to the client in respect of securities. SEBI (Custodian of Securities) Regulations, 1996 provide that the net worth of a custodian must be at least Rs. 50 crores. The custodian must segregate other services from custodial services. Custodians are an integral part of the secondary market and plays an important role to the institutional investors. It is required to maintain a code of conduct as per the Regulations, 1996. Stock Holding corporation of India is an important custodian operating in Indian capital market.

Delisting of shares: Shares can be traded at a stock exchange only when they are listed. The listing of shares results from the agreement, known as Listing Agreement, entered by the company with the stock exchange. As per the requirement of Listing Agreement, the company has to pay a listing fee (initial as well as annual) depending upon the paid-up capital of the company. A company may get its shares listed at more than one stock exchange. However, if the company finds that the volume/turnover of transactions of shares has gone down, it can get its shares delisted from some or all the stock exchanges. If a share is delisted from all, then its shares would not be transacted at any stock exchange. SEBI has issued SEBI (Delisting of Securities) Guidelines, 2003 in this regard. In certain cases, the stock exchange can itself delist a share which  has been suspended from trading for a period of six months.

Employee Stock Option: Employee stock option means an option given to employees, officers or directors of a company, which gives the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price. This option may be given in two forms :

  • Employee Stock Option Scheme (ESOS) under which options are granted to employees.
  • Employee Stock Purchase Scheme (ESPS) under which the shares are offered to employees as a part of public offer or otherwise.

An employee who belongs to promoters group is not eligible to participate in ESOS or ESPS. The shares issued in exercise of option shall have a lock-in period as specified by the company. The option granted to an employee is not transferable to any other person.

Euro Issues: When an Indian company raises funds from abroad in foreign currency, it is known as Euro-Issue. Two types of securities may be issued : Foreign Currency Convertible Bonds(FCCB) and Depository Receipt( DR). When a DR is issued and listed in US., it is known as American Depository Receipt( ADR) and when a DR is issued anywhere else, it is termed as Global Depository Receipt (GDR).

Firm Allotment of Shares: It refers to allotment of shares on a firm basis in public issues by issuing company to Indian and Multilateral Financial Institutions, Indian Mutual Funds, Foreign Institutional Investors, Overseas Corporate Bodies and Employees of the company.

Foreign Institutional Investor(FII): FII means an entity established or incorporated outside India and which is authorised by SEBI to transact on Indian Stock Exchanges for investment.

Initial Public Offering (IPO): When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities, or both, for the first time. IPO paves way for listing and trading of the securities.

Lock-in: It indicates freeze on sale/transfer of shares. The lock-in conditions have been imposed generally on shares of promoters.

Long Position: When a person buys a security, he is said to have taken a long position. Such position may be taken either with investment or speculative motives. Long positions are regulated by authorities through margin system.

Market Capitalisation: Market capitalisation refers to the total market value of the equity shares of the company. It is found by multiplying the number of outstanding equity shares by the closing price of the share.

MidCap: In MidCap segment, those companies are included (as per NSE classification) which have a market capitalization between Rs. 75 crores and Rs. 750 crores.

NASDAQ: It stands for National Association for Securities Dealers Automated Quotation. It is a type of Over the Counter Stock Exchange Operating in U.S.A. Most of the securities traded at NASDAQ are software companies.

Preferential Issue: It is an issue of securities by a listed company to a selected group of investors under Section 81 of the Companies Act, 1956, which is neither a right issue nor a public issue.

Price Band: It is the spread within which investors can bid in case of book building process.

Public Shareholding: Public shareholding means the shareholding in a company held by persons other than the promoter and/or acquirer.

Qualified Institutional Buyers (QIB): SEBI has issued a clarification/circular on 14.8.03 which defines the term QIB to include the following :

  • Public Financial Institutions as defined in Section 4A of the Companies Act, 1956.
  • Scheduled Commercial Banks, Mutual Funds.
  • State Institutional Development Corporations.
  • Foreign Institutional Investors, Venture Capital Funds and Foreign Venture Capital Investors.
  • Multinational and Bilateral Financial Institutions.
  • Insurance companies registered under IRDA.
  • Provident funds and Pension funds having minimum corpus of Rs. 25 crores

Quotations: The share prices are also known as quotations. There quotations are available in electronic media (TV News Channels, Internet, etc) or in Print media (News papers). Business dailies such as Economic Times, Financial Express, Business Standard, Business Line are providing these quotations. Generally, four quotations are available for a particular share for a particular day. These are : Open rate, Highest rate, Lowest rate and closing rate for the day. Additional information in respect of Market Capitalization, Trading Volume, Price-Earnings Ratio, etc., may also be available.

Red Harring Prospectus: It is a prospectus which does not have details of either the price or number of shares being offered or the amount of issue. This is used in book building issues only.

Sweat Equity: Sweat Equity are the shares issued by a company under Section 79A of the Companies Act,1956 to employees or directors (i) at a discount (to the market price), or (ii) for consideration other than cash, or (iii) for providing know-how or making available property right. Following conditions are prescribed for issue of Sweat Equity :

  • There must be of a class of shares already issued.
  • At least one year must have lapsed since company commenced business.
  • The issue must be authorised by a special resolution.

The shares must be issued as per SEBI (Issue of Sweat Equity) Regulations, 2002 (in case of listed companies) and as per Unlisted Companies (Issue of Sweat Equity Shares) Rules.2003 in case of unlisted companies. Valuation of intellectual property and the pricing of sweat equity shall be made as per the method given in the respective regulations. The sweat equity shares shall be locked-in for a period of three years.

Voluntary Delisting: It means delisting of securities of a body corporate voluntarily by a promoter or an acquirer