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Investment in Primary and Secondary Market ATM Tariquzzaman Executive Director 1
Securities l 2 Security includes any stock, transferable shares, scrip, note, debenture stock, bond, investment contract, and preorganization certificate or subscription, and, in general, any interest or instrument commonly known as a “security”; and, any certificate of deposit for, certificate of interest or participation in, temporary or interim certificate for, receipt for, or any warrant or right to subscribe to or purchase, any of the foregoing but does not include currency or any note, draft, bill of exchange or banker’s acceptance or any note which has a maturity at the time of issuance of not more than twelve months, exclusive of days of grace or any renewal thereof whose maturity is likewise limited …
3 Types of Shares ▪ Ordinary Shares ▪ Preference Shares l Cumulative Preference Shares; l Non-Cumulative Preference Shares; l Redeemable Preference Shares; l Non-Redeemable Preference Shares; l Convertible Preference Shares; l Non-Convertible Preference Shares; l Participating Preference Shares; l Non-Participating Preference Shares. Types of Debt Securities: · Corporate debentures/bonds; · Municipal bonds · Agency bonds · Government bonds
Characteristics of a Good Securities Market l Availability of past transaction information – l Liquidity – – – l l 4 must be timely and accurate marketability price continuity depth Transaction cost - lower is more efficient External efficiency - reflect all information
Types of Securities Market l l 5 Primary markets New issues Secondary markets Outstanding securities are bought and sold Third Market Over the Counter Market Fourth Market Private Placement Market
Primary Market- What is Prospectus? q q 6 What is Prospectus: A prospectus is an invitation issued to the public to take shares or debentures of the company. Any advertisement offering to the public shares or debentures of the company for sale is a prospectus. Format and Contents of the Prospectus: Matters to be stated and reports to be set out in prospectus are dealt with by the Companies Act, 1994 (Section-135) as well as by the Public Issue Rules, 1998 framed by SEC.
Format and contents of the prospectus l 7 A. Material Information 1. Financial statement of the company Assets & Liabilities (Balance sheet) Cash flow statement Profit & Loss Account 2. Additional disclosures.
Information to be contained in the Prospectus l Name of the issuer company; Amount and type of securities being issued; Offering price of the securities on a per unit and aggregate basis; Opening and closing date of subscription including for NRBs; Names and address of the underwriter (s); l Issue date of the prospectus; l l 8
Information to be contained in the Prospectus (contd. ) l 9 The statement “If you have any queries about this document you may consult issuer, issue manager and underwriter”
The following statements about the Commission’s Role to be included in bold type face l 10 The following statement in bold type face:
Risk factors as per SEC (Public Issue) Rules, 2006 l l l l l 11 Immediately following the cover page of the prospectus, all riskfactors and management’s perception about the same are to be clearly stated which may include, among others, : (a) interest rate risks; (b) exchange rate risks; © industry risks; (d) market and technology-related risks (e) potential or existing government regulations; (f) potential changes in global or national policies; (g) history of non operation, if any; and (h) Operational risks.
Other pertinent information (1) (2) (3) (4) (5) (6) 12 Use of Proceeds Description of business Description of property Plan of operation and discussion of financial condition Directors and Officers Involvement of Directors and Officers in certain legal proceedings
Other pertinent information (contd. ) (7) (8) (9) (10) (11) 13 Certain Relationships and Related Transactions Executive compensation Options granted to Officers, Directors and Employee Transaction with the Directors and Subscribers to the Memorandum Ownership of the Company’s securities
Other pertinent information (Contd. ) (12) (13) (14) (15) (16) 14 Determination of Offering Price Market for the Securities being offered Description of Securities outstanding being offered Debt Securities Financial statement requirements
Lock-in Provision l l 15 All issued shares of the issuer at the time of according consent to public offering shall be subject to a lock- in period of three years from the date of issuance of prospectus or commercial operation, whichever comes later: Provided that the persons, other than directors and those who hold 5% or more, who have subscribed to the shares of the company within immediately preceding two years of according consent, shall be subject to a lock-in period of one year from the date of issuance of prospectus or commercial operation, whichever comes later.
Refund of Subscription money In the case of non-allotment of securities, refund of subscription money of applicants resident in Bangladesh shall be made by account payee cheque/warrant payable to applicant. For this purpose the number of the bank account alongwith name of bank and branch shall be indicated in the securities application form. 16
The Financial Statements and Its Objectives 17 Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general purpose financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management’s stewardship of the resources entrusted to it.
Some Analytical Factors- Ratio Analysis Solvency Ratios 1. Quick Ratio = (Cash + Accounts Receivable)/Current Liabilities Measures ability to raise cash quickly, ignores inventory 2. Current Ratio = Current Assets/Current Liabilities General measure of liquidity 3. Current Liabilities to Net Worth = Current Liabilities/Net Worth Compares short-term liabilities to permanent invested capital 4. Current Liabilities to Inventory = Current Liabilities/Inventory Measures extent to which payment of current debts relies on sale of inventory 5. Total Liabilities to Net Worth = Total Liabilities/Net Worth Measures firm’s reliance on debt financing 6. 18 Fixed Assets to Net Worth = Fixed Assets/Net Worth Measures proportion of firm’s equity tied up in long-term assets
Efficiency Ratios 7. Collection Period = Accounts Receivable/Credit Sales per Day Measures firm’s efficiency in turning credit sales into cash 8. Sales to Inventory = Annual Net Sales/Inventory Measures speed that inventory moves from shelf to customer 9. Assets to Sales = Total Assets/Net Sales Measures efficiency with which assets are used to produce sales 10. Sales to Net Working Capital = Sales/Net Working Capital Measures aggressiveness or conservatism in financing sales 11. Accounts Payable to Sales = Accounts Payable/Annual Net Sales Measures how rapidly company pays its suppliers 19
Profitability Ratios 12. Return on Sales (Profit Margin) = Net Profit after Taxes/Annual Net Sales Measures profit per dollar of net sales 13. Return on Assets = Net Profit after Taxes/Total Assets Measures company’s efficiency in using assets to produce operating profit 14. Return on New Worth (Return on Equity) = Net Profit after Taxes/Net Worth Measures return to the suppliers of equity capital 20
Secondary Market: Category of the listed Companies q Settlement of Stock Exchange Transactions Regulations, 1998 grouped the listed companies of our stock exchanges into following four categories: - • A-category companies; B-category companies; Z-category companies; G-category companies; and N- category companies. • • 21
Category of the listed Companies ü • • • 22 A-category companies: Regular in holding the current AGM; Declared at least 10% dividend in the last calendar year; Newly listed company with at least 10% EPS; and Debentures and Mutual Funds. B-category companies: Regular in holding the current AGM; Declared less than 10% dividend in the last calendar year; and Newly listed company with less than 10% EPS;
Category of the listed Companies ü • • ü Z-category companies: Failed to hold current AGM; or Failed to declare dividend; or Not in operation for more than six months; or Accumulated loss exceeds paid-up capital, however, this condition shall not apply if the company declares dividend out of current years profit and holds AGM. G-category companies: Newly listed green field companies shall be grouped under this category. N-category companies: Newly listed companies shall be grouped under this category for first year. 23
Market Intermediaries Þ Þ Þ 24 Stock-broker/Stock-dealer and their authorized representative; Merchant Banker/Portfolio Manager/ Underwriter; Asset Management Company; Custodian; Trustee; Depository Participant (DP);
Market Intermediaries (Continue) q Broker is entitled to buy and sale the securities on others account q q q 25 and Dealer is entitled to buy and sale the securities for his own account; Broker/Dealers are the members of the exchanges; They are licensed by the Commission to act as broker/dealer; Authorised Representatives (AR) are employees of broker/dealer; Apart from the broker/dealers ARs are authorised to deal with the clients of the concerned broker; They are also licensed by the Commission; Their activities are regulated by SEC (Broker/Dealer and Authorized Representatives) Regualtions, 2000.
Obligations of the stock-broker to their customers Þ Þ 26 Accepting a customer to open a customer account for trading; Executing the customer’s order for buy or sell as per their written or telephonic order; Providing trade confirmation report on the executed order with details within 24 hours of trading; Making payment against sell of security, or delivery of security bought, to the customer on end of T+3 (For A, B, G and N categories scripts) or on end of T+7 (for Z categories script). In case of default, interest @ 1. 5 per month on the value of transaction is also payable to the customer.
Obligations of the stock-broker to their customers (continue) Þ Þ 27 To replace the defective script or refund the money to the customer with interest @2. 5% per month from the date of settlement of transaction to date of refund, along with the benefit accrued, if any, provided complaint is lodged within 10 days of book closure or 6 months of settlement date, whichever is earlier, for the defective script as per the settlement of transaction regulations of stock exchanges; To settle the customer’s complaint, if any, against the stockbroker concerned; To keep separately the customer’s securities from others’ securities; To keep separately the customers’ money through consolidated customer’s bank account from the broker’s money.
Responsibilities of investors to their stock-brokers Þ Þ Þ Þ 28 Signature of the investor/client in the Customer account information to form an contractual agreement; To know the client code number for trading; Introducer’s information; Terms & condition attached in the form for margin facilities; To set rate of Commission for trading by negotiation; To take acknowledgement receipt for share deposit with the signature of the authorized person of stock-broker; To take money receipt for fund deposit with the signature of the authorized person of stock-broker; Declaration given in respect of shares trading by director or sponsor etc.
Obligations of the investors for the market Þ Þ Þ 29 Investors should not be involved to Create artificial price through Syndication and Manipulation by involving with issuer companies; Not to Influence issuer companies to inflate financial report and declaring artificial dividend; Not to Influence/ Misguide others investors for trading; Not to open more than one account in different brokers and merchant banks for ill motives; Not to involve for spreading rumor or phony information in the market
How to Trade in the Stock Exchange q q q 30 Trading of securities on the stock exchanges can only be done through brokers of the concerned exchanges; An investor is required to open an account with a broker by filling -in a prescribed Customers Account Information Form; For trading in the demated securities’ it is required to have a Beneficiary Owners (BO) account with a Depository Participant (DP) in addition to the aforesaid account; An investor can trade through a broker either in cash or credit; The credit transaction, however, is subject to the provisions of Margin Rules, 1999;
How to Trade in the Stock Exchanges q q 31 Trading in the securities can be executed through written orders submitted to the concerned broker; Telephonic orders can also be submitted provided that such orders shall be confirmed in writing with in 24 hours; The price of the securities can not go beyond specified circuit breaker range and an investor can quote at the tick price of the securities as specified by the exchanges. Short-selling of the securities are prohibited if it is not done under Dhaka Stock Exchange (Short Sale) Regulations 2006
How to Trade in the Stock Exchanges q • ü ü 32 Types of Order Based on price, orders may be of the following categories, namely: Limit order; and Market order Limit order: Limit order must have a price limit which ensures that the order shall be traded at the price equal to or better than the limit price. Market order: Market order is the order to be executed at the touchline price. A market order is matched immediately on arrival in to the trading engine at the touchline price.
How to Trade in the Stock Exchanges q q q 33 All orders will match automatically. Orders which are at the most favorable price, that is, at the lowest selling or highest buying price, shall be executed first. If two or more orders are listed in the order book at the same price, the oldest order shall be executed first. Orders that cannot immediately be executed shall be queued for future execution in a specific order of priority mainly based on price and time of entry. If an order is executed partly, the remaining part of such order shall not lose its priority. The queue priority is determined by the system through an interactive process.
How to Trade in the Stock Exchanges q § § § ü ü ü 34 ü Trade Confirmation Trade confirmation note is a proof of the transaction issued by broker; The broker shall issue a trade confirmation note to his client within twenty four hours of the execution of order and it should be numbered and time stamped; The trade confirmation note shall show: Date of the trade; Name and quantity of the security bought or sold; Price of the security, brokerage and other charges; The order and howla or contract note number and date; etc.
How to Trade in the Stock Exchanges q 35 What is Howla or Contract Note The automated trading system of the exchanges automatically provides the contract note immediately upon completion of trade. This note is the evidence of transaction and shows the contract number with date of execution and other details of the concerned trade.
Clearing and Settlement q q 36 A trade executed through exchanges is settled amongst the brokers through the clearing house of the exchanges; In settlement of trade, except Z category securities, the buying and selling brokers deposit cheque and securities respectively to the clearing house on 2 nd day of the trade (T+1) and the clearing house deliver securities and give cheque to the buying and selling broker respectively on 4 th day of the trade (T+3). For settlement of the trades of the securities under Z-category the aforesaid periods are T+3 and T+7 respectively.
What is Depository ? Depository holds securities of investors in electronic form. Besides holding securities, a depository also provides services related to transaction in securities. 37
Who is Depository Participant (DP)? Depository interfaces with investors through its agent called depository participants (DP). DPs are like broker/ dealer of the stock exchanges. If an investor wants to utilize the services offered by a depository, the investor has to open an account with a DP. Financial institutions, banks, insurance companies, limited companies, approved clearing corporation, clearing house of stock exchanges and any registered stock dealer, stock broker, merchant banker, asset management company, custodian or any capital market intermediary can become DP. 38
Process of Account Opening The process of opening an account with the depository through a DP is similar to opening an account with a bank. Procedures : Approach DP Fill up an account opening form Sign a standard agreement 39
Am I restricted to having only one DP? No. There absolutely no restrictions on the number of DPs you can open accounts with but if your are an individual (not institution) then you can not open more than one account with the same DP. 40
Do I have to keep any minimum balance of securities in my account? No. In fact you can have zero balance in your account. 41
Benefits l l 42 No bad deliveries Immediate transfer of shares Reduction in handling large volume of papers Elimination of risks associated with physical certificates such as loss, theft, mutilation, forgery etc.
Services l l l l 43 Dematerialization i. e. , converting physical certificates to electronic form Rematerialization opposite of dematerialization Transfer of securities Settlement of trade executed in stock exchanges Pledging of dematerialized securities Electronic credit in public offering of companies Receipt of non-cash corporate benefits such as bonus, rights in electronic form
Dematerialization is a process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor’s account with his/her DP. 44
Can I dematerialize my share certificates ? Yes, you can dematerialize only those certificates that are already registered in your name and belong to the list of securities admitted for dematerialization. 45
Do my dematerialized shares have distinctive/certificate numbers ? No. Your dematerialized shares will not have any distinctive or certificate numbers. These shares are fungible 46
Can I dematerialize odd-lot shares ? Yes. Odd lot shares certificates can also be dematerialized. 47
How long the dematerialization process will take ? It may take only two days. 48
Can my electronic holdings be converted into certificates ? Yes. If you wish to get back your securities in physical form, all you have to do is to request your DP for rematerialization of the same. ‘Rematerialization is the term used for converting electronic holdings back into certificates. Your DP will forward your request to depository after verifying that you have the necessary balances. Depository in tern will intimate the registrar who will print the certificates for you 49
Will I get back the same certificates after rematerialization ? You may not be allotted certificates with the same distinctive and certificate numbers. However, it does not matter really. You will usually be allotted a new certificate. But for that matter your right as a shareholder will not be affected. 50
TRADING/SETTLEMENT l l l 51 Investors sells shares in any of the stock exchanges linked to depository through a broker of his choice Investors gives instruction to his DP for debit of his account and credit of his broker’s clearing member pool account. On the pay-in day investor’s broker gives instruction to his DP for delivery to clearing house of the relevant stock exchange The broker receives payment from the clearing house The investor receive payment from the broker for the sale in the same manner he would receive payment for sale in the physical mode.
Purchasing of dematerialized shares l l l 52 Investors purchase shares in any of the stock exchanges connected to depository through a broker of his choice and makes payment to his broker Broker arranges payment to clearing house Broker receives credit on his clearing account with his DP on the pay-out day Broker gives instruction to his DP to debit his clearing account and credit his client's account Investors gives instruction to his DP for receiving credit in his investor account If the instructions match investors account with his DP is credited
Why should I prefer to buy dematerialized shares ? When you buy dematerialized shares you become the owner of those shares as soon as they are credited to your account. This is unlike the physical market where it will take a long time. Further, the possibility of loss or theft of share certificates is completely eliminated. 53
Is it possible for me to get securities allotted to me in public offerings directly in dematerialized form? Yes, In fact in the public issue application form you have to mention your DP account number, any allotment due to you will be credited to your account. 54
Who will give me the benefits arising out of my holdings, say a bonus or a dividend ? When any corporate event such as rights or bonus or dividend is announced for a particular security, depository will give the details of all the clients having electronic holdings in that security as of the record date to the company. The company will then calculate the corporate benefits due to all the shareholders. The disbursement of cash benefits such as dividend/interest will be done by the company whereas depository will do the securities entitlements based on the information provided by the company. 55
What will be the proof of my de-mat securities ? As per provision of the Depositories Act, 1999 the statement given by the depository will be accepted as a prima facie evidence by a court of law. 56
Thank You The End 57