Investment in Primary
and
Secondary Market
ATM Tariquzzaman
Executive Director
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Securities
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Security includes any stock, transferable shares, scrip, note,
debenture, 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 …
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Types of Shares
▪ Ordinary Shares
▪ Preference Shares
Preference Shares
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Cumulative Preference Shares;
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Non-Cumulative Preference Shares;
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Redeemable Preference Shares;
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Non-Redeemable Preference Shares;
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Convertible Preference Shares;
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Non-Convertible Preference Shares;
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Participating Preference Shares;
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Non-Participating Preference Shares.
Types of Debt Securities:
· Corporate debentures/bonds;
· Municipal bonds
· Agency bonds
· Government bonds
Characteristics of a Good Securities Market
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Availability of past transaction information
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Liquidity
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must be timely and accurate
marketability
price continuity
depth
Transaction cost - lower is more efficient
External efficiency - reflect all information
Types of Securities Market
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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?
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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
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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
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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);
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Issue date of the prospectus;
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Information to be contained in the Prospectus
(contd.)
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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
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The following statement in bold type face:
“CONSENT OF THE SECURITIES AND EXCHANGE COMMISSION
HAS BEEN OBTAINED TO THE ISSUE/OFFER OF THESE
SECURITIES UNDER THE SECURITIES AND EXCHANGE
ORDINANCE, 1969, AND THE SECURITIES AND EXCHANGE
COMMISSION (PUBLIC ISSUE) RULES, 2006. IT MUST BE
DISTINCTLY UNDERSTOOD THAT IN GIVING THIS CONSENT THE
COMMISSION DOES NOT TAKE ANY RESPONSIBILITY FOR THE
FINANCIAL SOUNDNESS OF THE ISSUER COMPANY, ANY OF ITS
PROJECTS OR THE ISSUE PRICE OF ITS SECURITIES OR FOR THE
CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINION
EXPRESSED WITH REGARD TO THEM. SUCH RESPONSIBILITY LIES
WITH THE ISSUER, ITS DIRECTORS, CHIEF EXECUTIVE
OFFICER/CHIEF
FINANCIAL
OFFICER,
ISSUE
MANAGER,
UNDERWRITER AND/OR AUDITOR."
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Risk factors as per SEC (Public
Issue) Rules, 2006
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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)
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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)
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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)
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Determination of Offering Price
Market for the Securities being offered
Description of Securities outstanding being offered
Debt Securities
Financial statement requirements
Lock-in Provision
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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.
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The Financial Statements and Its Objectives
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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
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Fixed Assets to Net Worth = Fixed Assets/Net Worth
Measures proportion of firm’s equity tied up in long-term assets
Efficiency Ratios
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Collection Period = Accounts Receivable/Credit Sales per Day
Measures firm’s efficiency in turning credit sales into cash
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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
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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
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Secondary Market: Category of the listed
Companies
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Settlement of Stock Exchange Transactions
Regulations, 1998 grouped the listed companies of
our stock exchanges into following four categories:-
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A-category companies;
B-category companies;
Z-category companies;
G-category companies; and
N- category companies.
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Category of the listed Companies
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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
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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.
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Market Intermediaries
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Stock-broker/Stock-dealer and their authorized
representative;
Merchant Banker/Portfolio Manager/ Underwriter;
Asset Management Company;
Custodian;
Trustee;
Depository Participant (DP);
Market Intermediaries (Continue)
 Broker is entitled to buy and sale the securities on others account
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 2nd day of the trade (T+1) and the clearing
house deliver securities and give cheque to the buying and selling
broker respectively on 4th day of the trade (T+3). For settlement of
the trades of the securities under Z-category the the aforesaid
periods are T+3 and T+7 respectively.
What is Depository ?
A depository can be compared to a bank. A
Depository holds securities of investors in
electronic form. Besides holding securities, a
depository also provides services related to
transaction in securities.
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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.
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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
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Am I restricted to having only one DP?
No. There are 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.
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Do I have to keep any minimum balance of securities
in my account?
No. In fact you can have zero balance
in your account.
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Benefits
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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
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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
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.
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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.
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Do my dematerialized shares have
distinctive/certificate numbers ?
No. Your dematerialized shares will not have
any distinctive or certificate numbers. These
shares are fungible
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Can I dematerialize odd-lot shares ?
Yes. Odd lot shares certificates can also be
dematerialized.
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How long the dematerialization process
will take ?
It may take only two days.
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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
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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.
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TRADING/SETTLEMENT
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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
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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.
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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.
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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.
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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.
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Thank You
The End
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