📘 17.1 Investors and the Investing Process
What is the Investing Process?
The investing process involves understanding who can invest, the onboarding process, and the regulatory and informational requirements. Investors must go through a formal process to start investing, and it is essential to understand these steps and requirements to ensure compliance and a smooth investment experience.
17.1.1 Who Can Invest?
Eligible Investors
Typically, individuals, institutions, and entities that meet certain financial criteria and regulatory guidelines can invest. This includes residents, non-residents (NRIs), foreign entities, trusts, and others, depending on the specific regulations of the market. Investors must also adhere to the eligibility criteria set by investment managers and funds.
17.1.2 Client Onboarding Process
Steps in Onboarding
The onboarding process for investors involves several steps. Initially, the investor must complete necessary documentation, including Know Your Customer (KYC) forms. Then, the investor’s financial profile is assessed, and an investment strategy is discussed. This process ensures that the investment options align with the investor’s risk tolerance and financial goals.
17.1.3 Terms of Offer
Understanding Terms of Offer
The **Terms of Offer** outline the terms and conditions under which investments are made. These terms cover the investment’s duration, minimum investment amount, expected returns, fees, and other important factors. Investors should carefully read these terms to ensure that the investment aligns with their expectations and requirements.
17.1.4 Regulatory Requirements
Compliance and Regulations
Investments are subject to specific regulatory requirements set by the **Securities and Exchange Board of India (SEBI)** or other relevant authorities in different countries. These requirements may include proper documentation, disclosure of fees, taxes, and adherence to the regulations regarding the type of investments being offered. Compliance ensures that investors are protected and that the investment process is transparent.
17.1.5 Mandatory Investor Information
Required Information
Investors must provide essential information, such as personal details, financial status, risk tolerance, and tax information. This data helps investment managers to tailor portfolios to meet the investor’s needs and comply with regulatory standards. Proper documentation is vital to ensure transparency and security in the investment process.
17.1.6 Investor Folio or Account
What is an Investor Folio?
An investor folio is a unique identification assigned to each investor by the investment firm or fund manager. It helps in tracking the investments, maintaining records of transactions, and managing the portfolio. Each folio contains details of the investor’s holdings and helps manage the account effectively.
📘 6.2 Role and Function of the Secondary Market
🔄 6.2.1 Functions of Secondary Markets
💧 Liquidity
Enables investors to buy/sell previously issued securities. Ensures marketability, timely exit, and flexibility in portfolio management.
📈 Price Discovery
Prices reflect demand-supply and investor perception. Aids fair valuation for future issues and corporate actions.
📡 Information Signalling
Market prices instantly reflect new information, forcing companies to stay efficient and transparent.
📊 Economic Indicator
Indices and trading trends reflect the overall economy’s strength or slowdown — acting as financial barometers.
🏛️ Corporate Control
Low market valuation may invite takeovers — ensuring better governance and accountability by management.
🏗️ 6.2.2 Market Structure & Participants
- Market Infrastructure: Stock exchanges, clearing corporations, depositories
- Investors: Individuals, institutions, FPIs
- Issuers: Listed companies
- Intermediaries: Brokers, banks, custodians
- Regulators: SEBI and exchange compliance teams
📊 6.2.3 Market Information
🏷️ Market Capitalisation
Total value = share price × outstanding shares. Used to classify stocks (large, mid, small cap) and track market-to-GDP ratio.
💹 Market Turnover
Total trading volume/value. Indicates liquidity. Higher turnover = more active and efficient market.
📈 Market Indices
Representative benchmarks (Sensex, Nifty) track price movement of key stocks or sectors. Used for tracking, benchmarking, and forecasting.
🛡️ 6.2.4 Risk Management in Secondary Markets
📊 Capital Adequacy
Members must maintain minimum capital and net worth to absorb risks and meet obligations.
💼 Margins
Upfront payment by traders to reduce default risk. Collected on both buy and sell orders based on volatility.
🚦 Circuit Breakers
Auto-trading halts on abnormal index movements. Prevents panic and extreme volatility.
🔐 Settlement Guarantee
Clearing corporations ensure every trade settles — even if one party defaults.
🖥️ Online Monitoring
Real-time surveillance systems flag suspicious trades, large exposures, and unusual price/volume behavior.
📉 Price Monitoring
Exchanges monitor order books, unusual bids, and act against manipulation attempts.
📚 Book Inspection
Exchange/SEBI audits of brokers and trading firms to ensure compliance with all norms and investor protection rules.
📘 6.3 Corporate Actions
Corporate actions are decisions taken by a company that affect its shareholders — such as bonus issues, dividends, buybacks, and mergers. They impact stock price, capital structure, or ownership, and are regulated by SEBI and the Companies Act【225:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📝 6.3.1 Rights Issue
New shares offered to existing shareholders at a fixed ratio and price. Avoids dilution of holding. Traded as RE in demat form【225:1†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🎁 6.3.2 Bonus Issue
Free shares issued from company’s reserves. Increases number of shares, no cash flow involved. Improves market perception and liquidity【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
💰 6.3.3 Dividend
Share of profits paid to shareholders. Can be interim or final. Must be declared from earned profits; not allowed if company is in loss or has defaulted【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📉 6.3.4 Stock Split
Face value of shares reduced, increasing number of shares held. Makes high-priced shares more affordable and increases market liquidity【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🔙 6.3.5 Share Buyback
Company repurchases its own shares from open market using surplus funds. Reduces share capital, boosts EPS, and signals financial health【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🚫 6.3.6 Delisting
Permanent removal of shares from stock exchange. Can be voluntary (reverse book building) or compulsory (non-compliance)【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
🔗 6.3.7 Mergers & Acquisitions
Changes shareholding pattern. SEBI regulations protect minority shareholders by providing exit opportunities【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
📤 6.3.8 Offer for Sale
Existing investors (promoters, institutions) sell shares to the public. No fresh capital is raised. Used to meet minimum public shareholding norms【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.
