“The dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history.”~ Larry Summers
Newspapers remain replete with the terms like IPOs, FPOs, FIIS or SENSEX being bullish or bearish. For the uninitiated, they sound like Greek. More often than not, even law students, not having studied commerce in schools or colleges, find it difficult to grasp what all these terms mean. These terms belong to Capital Markets parlance, which is the place for raising capital for doing business. This article seeks to give a context, introduce the concept of Capital Markets, financial instruments employed for raising capital, how transactions take place, the regulatory framework thereof and a host of other issues. The Capital Markets hold a great promise to young law professionals who want to look beyond good old civil and criminal law practice and venture into new and exciting practice areas.
The economic reforms which started in the early 1990s brought in a shift in the business outlook of the country marked by a departure from a socialist way of doing business to a free-market approach. This departure introduced liberalization of legal regime, especially in exchange control laws like FEMA, enactment of laws relating to SEBI, Competition Law, amendments to Companies law etc., to pave way for a smooth transition from stifling license-quota raj to a liberating and entrepreneur-friendly legal regime. This has unleashed hitherto untapped energies of Indians in all the sectors of the economy. The reforms process has enabled the economy to attract billions of dollars as foreign direct investment in different sectors of the economy, has opened up the access to world markets for manpower, material and capital thereby bringing in phenomenal opportunities for businesses, industries and above all for entrepreneurship. Be it acquisition of businesses abroad, setting up new industries in India or overseas, financing power projects, creating business houses, building other social and business infrastructure, all requires capital or money, and Capital Markets are the markets from where money can be raised.
The essential distinguishing feature between the money and capital markets is the maturity period of the securities traded in them. The money market refers to all institutions and procedures that provide for transactions in short-term (periods of one year or less) debt instruments generally issued by borrowers with high credit ratings. Equity instruments, whether common or preferred, are not traded in the money market. On the other hand, the Capital Market refers to all institutions and procedures that provide for transactions in long-term (having maturity periods beyond one year) financialinstruments. In the broad sense, this encompasses term loans and financial leases, corporate equities and bonds. The funds that comprise a firm’s capital structure are raised in the Capital Markets. Important elements of the Capital Markets are the organized security exchanges and the over-the-counter markets.
Capital Markets are the markets to raise capital or money required by corporate houses and governments. There are three types of markets within the broader term “Capital Market”, they are equity, debt and derivative markets. The Capital Markets may be roughly classified into primary and secondary markets.
Financial instruments like equity and preference shares, fully convertible debentures, nonconvertible debentures and partly convertible debentures apart from new instruments like debentures bundled with warrants, participating preference shares, zerocoupon bonds, secured premium notes, etc. are traded or issued in the Capital Markets. The Trading Intermediaries who facilitate this trading include 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, depositories, custodians of securities, foreign institutional investors, Credit rating agencies etc.
A market that issues new securities on an exchange is a Primary Market. Companies, governments and other groupsobtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors, whether retail, corporate or fund houses. Secondary Market is where investors purchase securities or assets from other investors, rather than from issuing companies. The stock exchanges like Bombay Stock Exchange and National Stock Exchange constitute the Secondary Market.
Being a capital markets lawyer requires a slightly different skill set than say- a mergers and acquisitions transaction advisory lawyer or a foreign investment specialist. Not only are the areas of law governed by different sets of regulations and subject to separate governmental authorities, but the approach to capital markets is also different. While a keen attention to detail and comprehension is a valuable weapon in any young lawyer’s armory, this comes into sharp focus in capital markets which entails dealing with large volumes of company related data. This is further complicated by the fact that most capital markets transactions, whether it is a private placement or public offer are usually time bound. Therefore, one must be prepared to put in long hours of work at a stretch and a robust mental stamina would be well appreciated.
Specifically with regard to public issues, the capital markets lawyer has a unique position. Not only is he responsible to the issuer company- his client, like all lawyers are- but he is also responsible to the investing public at large. It must be kept in mind that it is largely through the legal due diligence that any major risk factors about the issuer company may be uncovered. Therefore, this dual-responsibility places a heavy burden upon the capital markets lawyer. Additionally, in public offers, since the offer document is to be read by the general public at large, one must have a good command over the English language in order to present information about the company succinctly and precisely
A newly issued IPO is considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank; after that any shares traded will be on the secondary market, between investors themselves. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.
Listing means admission of securities to dealings on a recognised stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institution/corporation, municipality, etc. The objectives of listing are mainly to provide liquidity to securities, mobilize savings for economic development, protect the interests of investors by ensuring full disclosures. Clause 49 of the Listing Agreement with stockexchanges provides the code of corporate governance prescribed by SEBI for listed Indian companies. With the introduction of clause 49, compliance with its requirements is mandatory for such companies. Corporate governance is all about protecting the interests of investors.
India started permitting foreign investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investments (FDI) and foreign portfolio investments (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI. For making portfolio investment in India, one should be registered either as a foreign institutional investor (FII) or with one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market. However, high-net-worth individuals (those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII.
The principal legislations which govern the Capital Markets are the Companies Act 1956, Securities and Exchange Board of India Act 1992, Depositories Act 1996, Securities Contract (Regulations) Act 1956 along with a host of regulations and rules framed by the regulator or otherwise. The Securities andExchange Board of India (SEBI) is the regulator for Capital Markets, and draws its powers and responsibilities from the SEBI Act, 1992. SEBI is constituted to protect the interests of investors in securities and to promote the development of, and to regulate, the securities markets. It is responsible for regulating the business in stock exchanges and any other securities markets. Needless to add, it takes great care in prohibiting fraudulent and unfair trade practices relating to securities markets by keeping a watchful eye, especially insider trading in securities. More importantly, it regulates substantial acquisition of shares and take-over of companies. It also promotes investors’ education and training of intermediaries of securities markets so as to create awareness amongst the Capital Markets participants and thereby to achieve the objective of a healthy Capital Market. SEBI introduced the Disclosure and Investor Protection Guidelines (DIP Guidelines) in 1999 to regulate the procedure for fund raising and the manner of disclosure in the offer documents. The DIP Guidelines have now been replaced with Issue of Capital and Disclosure Requirements Regulations in 2009 (ICDR).
The Capital Markets hold great opportunities for the legal professionals as it is still developing and unfolding. The professionals can represent both issuers and investment banks in the full range of securities offerings. There are different types of securities transactions which take place at Capital Markets which necessitate regulatory compliances apart from issues related with corporate governance. Apart from legal knowledge, the ability to analyse, interpret, evaluate, assimilate and synthesise large amounts of information is usually an essential part of lawyers’ skill set. Young professionals must acquire knowledge and experience through internships or otherwise to develop an understanding of Capital Market transactions and the complex regulatory regime to be able to excel in this field and reap the rewards.
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