Executive SummaryThe project on capital study is an attempt to study an overall primary market and secondary market in India. It’s helped to know and study the parameters opted by all the capital market and the companies who are operating themselves under the rules and regulation of capital market. The performance of capital market has registered a significant upward in recent times right from the beginning capital market attract every person as it has become common to see car on road every day and being a student of Finance I learned a lot from this project and it would help me a lot in making my career. I come to know a lot about Indian as well as international capital market and how they help there economy. The market for long term securities like Bonds, Equity stock and Preferred stock is divided into primary and secondary market. The primary market deals with the new issue of securities. Outstanding securities are traded in the secondary market or stock exchange. In the secondary market the investor can sell and buy securities.

Stock market predominantly deals in the equity shares debts instrument like bonds and debenture are also traded in the stock market. Well regulated and active stock market promotes capital formation. Growth of the primary market depends on the secondary market. The health of the economy is reflected by the growth of the stock market. Company raises funds to finance the project to various methods. The promoters can bring the own money or borrow from the financial institution or mobilize capital by issuing securities. The funds may be raise from issue of fresh share at par, or at premium preference shares debentures or global depository receipts.

The main objectives of a capital issue are given below: -

To promote a new company

To expand an existing company

To diversify the production

To meet the regular working capital requirements

To capitalize the reverses

Securities market provides a channel of allocation of saving to those who have productiveness in them. As a results the savers and investors are not constrained by their individualities but by the economy’s ability to invest and save respectively, which inevitably enhance saving and enhancement in the economy. The national stock exchange of India ltd (NSE) has genesis the report of the high powered study group on establishment of new stock exchanges, which recommended promotion of a national stock exchange by financial institution to provide access to investors from all across the country on an equal footing, based on the recommendation, NSE was promoted by leading financial institution at the behest of the government of India and was incorporated in November 1992 as a tax paying company unlike other stock exchange in the country.

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UNIT- IIntroduction:

Concept of capital market.

Structure of capital market.

Present face of capital market.

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CONCEPT OF CAPITAL MARKETThe past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, number stock exchange and other intermediaries and the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population.

Along with this growth, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed several institutional changes resulting in drastic reduction in transaction cost and sufficient improvement in efficiency, transparency, liquidity and safety. In a short span of time, Indian derivatives market has got a place in list of top global exchanges.

INTRODUCTIONThe market for longterm securities like bonds, equity stocks and preferred stocks is divided into primary market and secondary market. The primary market deals with the new issues of securities. Outstanding securities are traded in the secondary market, which is commonly known as stock market or stock exchange. In the secondary market, the investors can sell and buy securities. Stock markets predominantly deal in the equity shares.

Debt instruments like bonds and debentures are also traded in the stock market. Well-regulated and active stock market promotes capital formation.  Growth of the primary market depends on the secondary market. The health of the economy is reflected by the growth of the stock market. Companies raise funds to finance their projects through various methods. The promoters can bring their own money or borrow from the financial institutions or mobilize capital by issuing securities. The funds may be raised through issue of fresh shares at par or premium, preference shares, debentures or global depository receipts. The main objectives of a capital issue are given below:

To promote a new company

To expand an existing company

To diversify the production

To meet the regular working capital requirements

To capitalize the reverses

Securities markets provide a channel for allocation of savings to those who have a productive need for them. As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.

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MARKET SEGMENTS

The securities market has two interdependent and inseparable segments: the primary and the secondary market. The primary market provides the channel for creation of new securities through issuance of financial instruments by public companies as well as Governments and Government agencies and bodies whereas the secondary market helps the holders of these financial instruments to sale for exiting from the investment. The price signals, which subsume all information about the issuer and his business including associated risk, generated in the secondary market, help the primary market in allocation of funds. The primary market issuance is done either through public issues or private placement.

A public issue does not limit any entity in investing while in private placement, the issuance is done to select people. In terms of the Companies Act, 1956, an issue becomes public if it results in allotment to more than 50 persons. This means an issue resulting in allotment to less than 50 persons is private placement.

There are two major types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the governments (central and state governments) issue debt securities (dated securities, treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs.

The exchanges do not provide facility for spot trades in a strict sense. Closest to spot market is the cash market in exchanges where settlement takes place after some time. Trades taking place over a trading cycle (one day under rolling settlement) are settled together after a certain time. All the 23 stock exchanges in the country provide facilities for trading of corporate securities. Trades executed on NSE only are cleared and settled by a clearing corporation which provides novation and settlement guarantee.

Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities including government securities in both retail and wholesale mode. NSE also provides trading in derivatives of equities, interest rate as well indices.

In derivatives market (F&O market segment of NSE), standardized contracts are traded for future settlement. These futures can be on a basket of securities like an index or an individual security. In case of options, securities are traded for conditional future delivery. There are two types of options – a put option permits the owner to sell a security to the writer of options at a predetermined price while a call option permits the owner to purchase a security from the writer of the option at a predetermined price. These options can also been individual stocks or basket of stocks like index. Two exchanges, namely NSE and the Stock Exchange, Mumbai (BSE) provide trading of derivatives of securities.

Today the market participants have the flexibility of choosing from a basket of products like:

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Equities Bonds issued by both Government and Companies Futures on benchmark indices as well as stocks Options on benchmark indices as well as stocks Futures on interest rate products like Notional 91-day T-Bills, 10 year notional zero.

Reforms in the securities market, particularly the establishment and empowerment of SEBI, market determined  allocation of resources, screen based nation-wide trading, dematerialization and electronic transfer of securities, rolling settlement and ban ondeferral products, sophisticated risk management and derivatives trading, have greatly improved the regulatory framework and efficiency of trading and settlement. Indian market is now comparable to many developed markets in terms of a number of qualitative parameters.

PRODUCTS AND PARTICIPANTS

Financial markets facilitate the reallocation of savings from savers to entrepreneurs Savings are linked to investments by a variety of intermediaries through a range of complex financial products called “securities” which is defined in the Securities Contracts (Regulation) Act, 1956 to include shares, bonds, scrip’s, stocks or other marketable securities of like nature in or of any incorporate company or body corporate,  government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government.

It is not that the users and suppliers of funds meet each other and exchange funds for securities. It is difficult to accomplish such double coincidence of wants. The amount of funds supplied by the supplier may not be the amount needed by the user. Similarly, the risk, liquidity and maturity characteristics of the securities issued by the issuer may not match preference of the supplier. In such cases, they incur substantial search costs to find each other. Search costs are minimized by the intermediaries who match and bring the suppliers and users of funds together. These intermediaries may act as agents to match the needs of users and suppliers of funds for a commission, help suppliers and users in creation and sale of securities for a fee or buy the securities issued by users and in turn, sell their own securities to suppliers to book profit. It is, thus, a misnomer that securities market disintermediates by establishing a direct relationship between the savers and the users of funds.

The market does not work in a vacuum; it requires services of a large variety of intermediaries. The disintermediation in the securities market is in fact an intermediation with a difference; it is a risk-less intermediation, where the ultimate risks are borne by the savers and not the intermediaries. A large variety and number of intermediary’s provide intermediation services in the Indian securities market. The securities market has essentially three categories of participants, namely the issuers of securities, investor’s insecurities and the intermediaries and products include equities, bonds and derivatives. The issuers and investors are the consumers of services rendered by the intermediaries while the investors are consumers (they subscribe for and trade in securities) of securities issued by issuers.

DEPENDENCE CAPITAL MARKET

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Three main sets of entities depend on securities market. While the corporates and governments raise resources from the securities market to meet their obligations, the households invest their savings in the securities.

Corporate Sector

The 1990s witnessed emergence of the securities market as a major source of finance for trade and industry. A growing number of companies are accessing the securities market rather than depending on loans from FIs/banks. The corporate sector is increasingly depending on external sources for meeting its funding requirements. There appears to be growing preference for direct financing (equity and debt) to indirect financing (bank loan) within the external sources,

According to CMIE data, the share of capital market based instruments in resources raised externally increased to 53% in 1993-94, but declined thereafter to 33% by 1999-00 and further to 21% in 2001-02. In the sector-wise shareholding pattern of companies listed on NSE, it is observed that on an average the promoters hold more than 55% of total shares. Though the non- promoter holding is about 44%, Indian public held only 17% and the public float (holding by FIIs, MFs, Indian public) is at best 25%.

There is not much difference in the shareholding pattern of companies in different sectors. Strangely, 63% of shares in companies in media and entertainment sector are held by private corporate bodies though the requirement of public offer was relaxed to 10% for them. The promoter holding is not strikingly high in respect of companies in the IT and telecom sectors where similar relaxation was granted.

Governments Along with increase in fiscal deficits of the governments, the dependence on market borrowings to finance fiscal deficits has increased over the years. During the year 1990-91, the state governments and the central government financed nearly 14% and 18% respectively of their fiscal deficit by market borrowing. In percentage terms, dependence of the state government’s on market borrowing did not increase much during the decade 1991-2001. In case of central government, it increased to 77.6% by 2002-03.

Households

According to RBI data, household sector accounted for 82.4% of gross domestic savings during2001-02. They invested 38% of financial savings in deposits, 33% in insurance/provident funds,11% on small savings, and 8% in securities, including government securities and units of mutual funds during 2001- 02. Thus the fixed income bearing instruments are the most preferred assets of the household sector. Their share in total financial savings of the household sector witnessed an increasing trend in the recent past and is estimated at 82.4% in 2001- 02. In contrast, the share of financial savings of the household sector in securities (shares, debentures, public sector bonds and units of UTI and other mutual funds and

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government securities) is estimated to have gone down from 22.9% in 1991-92 to 4.3% in 2000-01, which increased to 8% in 2001-02.

Investor Population

The Society for Capital Market Research and Development carries out periodical surveys of household investors to estimate the number of investors. Their first survey carried out in 1990 p l ac ed t he t o t a l num ber o f sha r e ow ner s a t 90 -100 l akh . The i r s econd s u rvey e s t ima ted the number of share owners at around 140-150 lakh as of mid-1993

CAPITAL MARKET AT A GLANCE

Primary market

Stocks available for the first time are offered through new issue market. The issuer may be new company. These issues may be of new type or the security used in the past. In the new i s s ue marke t t he i s s ue r can be cons i de red a s a ma nufac tu r e r . The i s su i ng hous es investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public. A total of Rs. 2,520,179 million were raised by the government and corporate sector during 2002-03 as against Rs. 2,269,110 million during the preceding year.  Government raised about two third of the total resources, with central government alone raising nearly Rs. 1, 511,260 million. Corporate Securities Average annual capital mobilization from the primary market, which used to be aboutRs.70 crore in the 1960s and about Rs.90 crore in the 1970s, increased manifold during the1980s, with the amount raised in 1990-91 being Rs. 4,312 crore. It received a further boostdu r i ng   the  199 0s  wi th   t he   cap i t a l   r a i se d  by  non -gove rnm en t   pub l i c   compan i e s   r i s i ng sharply to Rs. 26,417 crore in 1994-95. The capital raised which used to be less than 1% of gross domestic saving (GDS) in the 1970s increased to about 13% in 1992-93. In real terms, the capital raised increased 4 times between 1990-91 and 1994-95. During 1994-95, the amount raised through new issues of securities from the securities market accounted for about four-fifth of the disbursements by FIs. Issuers have shifted focus to other avenues for raising resources like private placement.

There is a preference for raising resources in the primary market through private placement of debt instruments. Private placements accounted for about 93% o f   t o t a l resources mobilized through domestic issues by the corporate sector during 2002-03. Rapid dismantling of shackles on institutional investments and deregulation of the economy are driving growth of this segment. There are several inherent advantages of relying on private placement route for raising resources. While it is cost and time effective method of raising funds and can be structured to meet the needs of the entrepreneurs, it does not require detailed compliance with formalities as required in public or rights issues. It is believed in some circles that private placement has crowded out public issues. However, to prevent public issues from being passed on as private placement, the Companies (Amendment) Act, 2001 considers offer of securities to more than 50 persons as made to public. Indian market is getting

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integrated with the global market though in a limited way through euro issues. Since 1992, when they were permitted access, Indian companies have raised about Rs. 34,264 million through ADRs/GDRs. By the end of March 2003, 502 FIIs were registered with SEBI. They had net cumulative investments over of US $ 15.8 billion by the end of March 2003. Their operations influence the market as they do delivery-based business and their knowledge of market is considered superior. The market is getting institutionalized as people prefer mutual funds as their investment vehicle, thanks toevolution of a regulatory framework for mutual funds, tax concessions offered bygovernment and preference of investors for passive investing. The net collections by MFs picked up during this decade and increased to Rs. 199,530 million during 1999-00. This declined to Rs. 111,350 million during 2000-01 which may be attributed to increase in rate o f t ax on i ncome d i s t r i bu t ed by deb t o r i en t ed mu tua l f unds and l a ck lu s t e r s ec onda ry market. The total collection of mutual funds for 2002-03 has been Rs. 105,378 million. Starting with an asset base of Rs. 250 million in 1964, the total assets under management at the end of Ma rch 2003 w as Rs . 794 ,640 m i l l i on . The num ber o f hous eho lds ow n ing un i t s o f M F s exceeds the number of households owning equity and debentures. At the end of financial year March 2003, according to a SEBI press release 23 million unit holders had invested in units of MFs, while 16 million individual investors invested in equity and or debentures.

Government Securities

The primary issues of the Central Government have increased many-fold during thedecade of 1990s from Rs. 89,890 million in 1990-91 to Rs. 1,511,260 million in 2002-03. The issues by state governments increased by about twelve times from Rs. 25,690 million to Rs.308,530 million during the same period. The Central Government mobilized Rs. 1,250,000million through issue of dated securities and Rs. 261,260 million through issue of T-bills.

After meeting repayment liabilities of Rs. 274,200 million for dated securities, andredemption of T-bills of Rs. 195,880 million, and net market borrowing of Central Government amounted to Rs. 1,041,180 million for the year 2002-03. The state government’s collectively raised Rs. 305,830 million during 2002-03 as against Rs. 187,070 million in the preceding year. The net borrowings of State Governments in 2002-03 amounted to Rs. 290,640million. Along with growth of the market, the investor base has become very wide.

Inaddition to banks and insurance companies, corporates and individual investors are investing in government securities. With dismantling of control regime, and gradual lowering of the SLR and CRR, Government is borrowing at near–market rates. The coupons across maturities went down recently signifying lower interest rates. The weighted average cost of its borrowing at one stage increased to 13.75% in 1995- 96, which declined to 7.34% in 2002-03. The maturity structure of government debt is also changing. In view of bunching of redemption liabilities in the medium term, securities with higher maturities were issued during 2002-03. About 64% of primary issues were raised through securities with maturities above 5 years and up to 10 years. As a result the weighted average maturity of dated securities increased to 13.83 years from 6.6 years in 1997-98.

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Relationship between the Primary and Secondary Market

1 . The new issues market cannot function without the secondary market. The secondary market or the stock market provides liquidity for the issued securities. The issued securities are traded in the secondary market offering liquidity to the stocks at affair price.

2. The stock exchanges through their listing requirements, exercise control over the primary market. The company seeking for listing on the respective stock exchange has to comply with all the rules and regulations given by the stock exchange.

3. The primary market provides a direct link between the prospective investors and the company. By providing liquidity and safety, the stock markets encourage the public to subscribe to the new issues. The marketability and the capital appreciation provided in the stock market are the major factors that attract the investing public towards the stock market. Thus, it provides an indirect link between the savers and the company.

4. Even though they are complementary to each other, their functions and the organizational set up are different from each other. The health of the primary market depends on the secondary market and vice versa.

Functions of Primary Market

The main service functions of the primary market are organization, underwriting and distribution. Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issue, and timing of the issue and floatation method of the issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. Distribution refers to the lead managers and brokers to the issue. In the new issue market stocks are offered for the first time. The functions and the organization of the new issue market are different from the secondary market.

In the new issue the lead managers manage the issue, the under writers assure to take up the unsubscribed portion according to his commitment for a commission and the bankers take up the responsibility of the collecting the application form and the money. Advertising agencies promote the new issue through advertising. Financial institutions and underwriter lend term loans to the company. Government agencies regulate the issue. The new issues are offered through prospectus. The prospectus is drafted according to SEBI guidelines disclosing the needed information to the investing public. In the bought out deal banks or accompany buys the promoters shares and they offer them to the public at a later date. This reduces the cost of raising the fund. Private placement means placing of the issue with financial institutions. They sell shares to the investors at a suitable price. Right issue means the allotment of shares to the previous shareholders at a pro-ratio basis. Book building involves firm allotment of the instrument to a syndicate created by the lead managers.

Thebook runner manages the issue. Norms are given by the SEBI to price the issue.Proportionate allotment method is adopted in the allocation of shares. Project appraisal, disclosure in the

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prospectus and clearance of the prospectus by the stock exchanges protect the investors in the primary market along with the active role played by the SEBI.

Secondary market

The market for long-term securities like bonds, equity stocks and preferred stocks is divided into primary market and secondary market. The primary market deals with the new issues of securities. Outstanding securities are traded in the secondary market, which is commonly known as stock market or stock exchange. In the secondary market, the investors can sell and buy securities. Stock markets predominantly deal in the equity shares. Debt instruments like bonds and debentures are also traded in the stock market.

Well-regulated and active stock market promotes capital formation. Growth of the primary market depends on the secondary market. The health of the economy is reflected by the growth of the stock market.

Corporate Securities the number of stock exchanges increased from 11 in 1990 to 23 now. All the exchanges are fully computerized and offer 100% on-line trading. 9,413 companies were available for trading on stock exchanges at the end of March 2003. The trading platform of the stock exchanges was accessible to 9,519 members from over 358 cities on the same date. The market capitalization grew tenfold between 1990-91 and 1999-00. It increased by 221% during 1991-92 and by 107% during 1999-00. All India market capitalization is estimated at Rs. 6,319,212 million at the end of March 2003. The market capitalization ratio, which indicates the size of the market, increased sharply to 57.4% in 1991-92following spurt in share prices. The ratio further increased to 85% by March 2000. It, however, declined to 55% at the end of March 2001 and to 29% by end March 2003.The trading volumes on exchanges have been witnessing phenomenal growth during the1990s. The average daily turnover grew from about Rs.1500 million in 1990 to Rs. 120,000 million in 2000, peaking at over Rs. 200,000 million. One-sided turnover on all stock exchanges exceeded Rs. 10,000,000 million during 1998-99, Rs. 20,000,000 million during 1999-00 and approached Rs. 30,000,000 million during 2000-01.

However, the trading volume substantially depleted to Rs.9, 689,541 million in 2002-03. The turnover ratio, which reflects the volume of trading in relation to the size of the market, has been increasing by leaps and bounds after the advent of screen based trading system by the NSE. The turnover ratio for the year 2002-03 increased to 375 but fell substantially due to bad market conditions to 119 during 2001-02 regaining its position accounted 153.3% in 2002-03.

The relative importance of various stock exchanges in the market has undergone dramatic change during this decade. The increase in turnover took place mostly at the large big exchanges and it was partly at the cost of small exchanges that failed to keep pace with the changes. NSE is the market leader with more 85% of total turnover (volumes on all segments) in 2002-03. Top 5 stock exchanges accounted for 99.88% of turnover, while the rest 18 exchange for less than 0.12% during 2002-03. About ten exchanges reported nil turnovers during the year.

Role of the Secondary 

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Market when company management has different objectives than its outside investors, "agency “and "information" problems may result. For example, management may exert less than optimal effort, may pursue goals that simply enhance its own power and control, or may squander or divert company resources. In addition, to the extent that management is better informed than outside investors about the company's financial situation, this creates an informational asymmetry.

This, in turn, may result in management being unable to convince its outside investors of the true value of the company as well as of management’s intentions. As a consequence, management also may find that it is not able to raise as much capital as it wants or needs to finance new projects, or that management may have to surrender too much of the value of the firm to raise the capital it wants or needs.

"Governance" refers to the various mechanisms that exist to mitigate these agency and information problems. These mechanisms are numerous, some involving capital markets (e.g., facilitation of corporate control via takeover) while others do not, at least not directly (e.g., the role of the board of directors as a monitoring device). These major mechanisms will be discussed. We use the term "market-based governance" to refer to the role of capital markets in alleviating the agency and information problems, by functioning as an effective conduit for monitoring and controlling management's sub optimal behavior. Market-based governance may take different forms. However, generally speaking, such governance takes the form of facilitating the monitoring of management by outsiders, and aggregating information—in the form of equilibrium prices (or price discovery)—to help guide management decisions within the firm.

Monitoring and Control

As noted, secondary equity markets serve as a conduit for monitoring and controlling management by outsiders. First, markets generate information that helps outside investors Evaluate the quality of past management decisions. Second, the threat of a takeover may mitigate management inefficiencies. Third, information on stock-market prices provides for effective incentives for management.

And fourth, the rich menu of contracts provided in the market allows private workouts of financial distress, easing the transfer of control.

For purposes of our analysis below, we have divided monitoring into two categories

Market-based monitoring

Non market-based monitoring. Market-Based Monitoring. 1 Active Shareholders: The secondary equity market can facilitate effective monitoring by providing the ability to build positions so as to influence management decisions in situations where a change in corporate policies could increase a firm's value.

II. 2 Financial intermediaries as delegated monitors:

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Banks closely monitor their business borrowers, and collect information and scrutinize major investment and financing decisions. In doing so, they can threaten to withhold financing should management act in a manner contrary to the banks' interests. Monitoring via business groups in some countries, such as Japan and Korea, corporate actions are coordinated within a family of interrelated firms, with a main bank at the center. Firms in the group are interconnected through intricate vertical and horizontal business relationships and cross-ownership.

Members of the business group, with the lead participation of the main bank, closely monitor the actions of a member firm's management.

The Legal System:

The four main legislations governing the securities market are: (a) the SEBI Act, 1992which establishes SEBI to protect investors and develop and regulate securities market; (b)the Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; and (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities. Government has framed rules under the SCRA, SEBI Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, and for prevention of unfair trade practices, insider trading, etc. Under these Acts, Government and SEBI issue notifications, guidelines, and circulars which need to be complied with by market participants. The SROs like stock exchanges have also laid down their rules of game.

The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The activities of these agencies are coordinated by the High Level Committee on Capital Markets. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules and regulations under the securities laws are administered by SEBI. The power sunder the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules. The legal system governs both the rights of management and the rights of investors. The legal system also specifies the recourse available to investors. Recent research indicates that countries vary in the level of protection afforded to minority shareholders (LaPorta et al, 1996). Generally, countries with common-law traditions afford the highest protection, while civil-law countries, particularly the French civil-law systems, provide the least amount of protection.Functions of Stock Exchange

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Maintains active trading: Shares are traded on the stock exchanges, enabling the investors to buy and sell securities. The prices may vary from transactions to transaction.

A continuous trading increases the liquidity or marketability of the shares traded on the stock exchanges.

Fixation of prices: Price is determined by the transactions that flow from investors ‘demand and suppliers’ preferences. Usually the traded prices are made known to the public. This helps the investors to make better decisions.

Ensures safe and fair dealing: The rules, regulations and by-laws of the stock exchanges’ provide a measure of safety to the investors. Transactions are conducted under competitive conditions enabling the investors to get a fair deal.

Aids in financing the industry: A continuous market for shares provides a favorable climate for raising capital. The negotiability and transferability of the securities helps the companies to raise long-term funds. When it is easy to trade the securities, investors are willing to subscribe to the initial public offerings. This stimulates the capital formation.

Dissemination of information: Stock exchanges provide information through their various publications. They publish the share prices traded on daily basis along with the volume traded. Directory of Corporate Information is useful for the investors ‘assessment regarding the corporate. Handouts, handbooks and pamphlets provide information regarding the functioning of the stock exchanges.

Performance inducer: The prices of stocks reflect the performance of the traded companies. This makes the corporate more concerned with its public image and tries to maintain good performance.

Self-regulating organization: The stock exchanges monitor the integrity of the members, brokers, listed companies and clients. Continuous internal audit safeguards the investors against unfair trade practices. It settles the dispute between member brokers, investors and brokers.

Research in Securities Market

In order to deepen the understanding and knowledge about Indian capital market, and to assist in policy-making, SEBI has been promoting high quality research in capital market. It has set up an in-house research department, which brings out working papers on a regular basis.

In collaboration with NCAER, SEBI brought out a ‘Survey of Indian Investors’, which estimates investor population in India and their investment preferences. SEBI has also tied up with reputed national and international academic and research institutions for conducting research studies/projects on various issues related to the capital market. In order to improve market efficiency further and to set international benchmarks in the securities industry, NSE administers a scheme called the NSE Research Initiative with a view to develop an information base and a better insight into the working of securities market in India.

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The objective of this initiative is to foster research, which can support and facilitate. (a) Stock exchanges to better design market micro-structure.(b) Participants to frame their strategies in the market place.(c) Regulators to frame regulations.(d) Policy makers to formulate policies.(e) Expand the horizon of knowledge. The Initiative has received tremendous response.

Testing and Certification

The intermediaries, of all shapes and sizes, who package and sell securities, compete with one another for the chance to handle investors/issuers’ money. The quality of their services determines the shape and health of the securities market. In developed markets and in some of the developing markets, this is ensured through a system of testing and certification of persons joining market intermediaries in the securities market. A testing and certification mechanism that has become extremely popular and is sought after by the candidates as well as employers is a unique on-line testing and certification programme called National Stock Exchange’s Certification in Financial Markets (NCFM).

It is an on-line fully automated nation-wide testing and certification system where the entire process from generation of question paper, invigilation, testing, assessing, scores reporting and certifying is fully automated - there is absolutely no scope for human intervention. It allow tremendous flexibility in terms of testing centers, dates and timing and provides easy accessibility and convenience to candidates as he can be tested at any time and from any location. It tests practical knowledge and skills, that are required to operate in financial markets, in a very secure and unbiased manner, and certifies personnel who have a proper understanding of the market and business and skills to service different constituents of the market. It offers 9 financial market related modules.

Market DesignCorporate Securities:

The Disclosure and Investor Protection (DIP) guidelines prescribe a substantial body of requirements for issuers/intermediaries, the broad intention being to ensure that all concerned observe high standards of integrity and fair dealing, comply with all the requirements with due skill, diligence and care, and disclose the truth, whole truth and nothing but truth.

The guidelines aim to secure fuller disclosure of relevant information about the issuer and the nature of the securities to be issued so that investor scan takes informed decisions. For example, issuers are required to disclose any material ‘risk factors’ and give justification for pricing in their prospectus. An unlisted company can access the market up to 5 times its pre-issue net worth only if it has track record of distributable profits and net worth of Rs. 1 crore in 3 out of last five years. A listed company can access up to 5 times of its pre-issue net worth. In case a company does not have track record or wishes to rise beyond 5 times of its pre-issue net worth, it can access the market only through book building with minimum offer of 60% to qualified institutional buyers.

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Infrastructure companies are exempt from the requirement of eligibility norms if their project has been appraised by a public financial institution and not less than 5% of the project cost is financed by any of the institutions, jointly or severally, by way of loan and/or subscription to equity. The debt instruments of maturities more than 18 months require credit rating. If the issue size exceeds Rs. 100 crore, two ratings from different agencies are required. Thus the quality of the issue is demonstrated by track record/appraisal by approved financial institutions/credit rating/subscription by QIBs. Thelead merchant banker discharges most of the pre-issue and post-issue obligations. He satisfies himself about all aspects of offering and adequacy of disclosures in the offer document. He issues a due diligence certificate stating that he has examined the prospectus, he finds it in order and that it brings out all the facts and does not contain anything wrong or misleading.

He also takes care of allotment, refund and dispatch of certificates. The admission to a depository for dematerialization of securities is a prerequisite for making a public or rights issue or an offer for sale. The investors, however, have the option of subscribing to securities in either physical form order materialized form. All new IPOs are compulsorily traded in dematerialized form. Every public listed company making IPO of any security for Rs. 10 crore or more is required to do so only in dematerialized form.

Government Securities: The government securities market has witnessed significant transformation in the 1990s. With giving up of the responsibility of allocating resourcesfrom securities market, government stopped expropriating seigniorage and startedborrowing at near - market rates. Government securities are now sold at market related coupon rates through a system of auctions instead of earlier practice of issue of securities at very low rates just to reduce the cost of borrowing of the government. Major reforms initiated in the primary market for government securities include auction system (uniform price and multiple price method) for primary issuance of T-bills and central government dated securities, a system of primary dealers and non-competitive bids to widen investor base and promote retail participation, issuance of securities across maturities to develop a yield curve from short to long end and provide benchmarks for rest of the debt market, innovative instruments like, zero coupon bonds, floating rate bonds, bonds with embedded derivatives, availability of full range ( 91-day and 382-day) of T-bills, etc.

Secondary Market

Corporate Securities:

The stock exchanges are the exclusive centers for trading of securities. Though the area of operation/jurisdiction of an exchange is specified at the time of its recognition, they have been allowed recently to set up trading terminals anywhere in the country. The three newly set up exchanges (OTCEI, NSE and ICSE) were permitted since their inception to have nationwide trading. The trading platforms of a few exchanges are now accessible from many locations. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through the Internet and mobile devices. This made a huge difference in geographically vast country like India.

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Exchange Management:

Most of the stock exchanges in the country are organized as “mutual” which was considered beneficial in terms of tax benefits and matters of compliance. The trading members, who provide brokering services, also own, control and manage the exchanges. This is not an effective model for self-regulatory organizations as the regulatory and public interest of the exchange conflicts with private interests.

Effortsare on to demutualise the exchanges whereby ownership, management and trading membership would be segregated from one another. Two exchanges viz. OTCEI and NSE are demutualized from inception, where ownership, management and trading are in the hands of three different sets of people. This model eliminates conflict of interest and helps the exchange to pursue market efficiency and investor interest aggressively.

Membership:

The trading platform of an exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker complies with the code of conduct prescribed by SEBI. Over time, a number of brokers - proprietor firms and partnership firms – have converted themselves into corporates. The standards for admission of members stress on factors, such as corporate structure, capital adequacy, track record, education, experience, etc., and reflect a conscious endeavor to ensure quality broking services.

Demat Trading:

The Depositories Act, 1996 was passed to prove for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form.  In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. Two depositories, viz. NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities.

At the end of March 2002, 4,172 and 4,284 companies were connected to NSDL and CDSL respectively. The number of dematerialized securities increased to 56.5billion at the end of March 2002. As on the same date, the value of dematerialized securities was Rs. 4,669 billion and the number of investor accounts was 4,605,588. All actively traded scraps are held, traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. The admission to a depository for dematerialization of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed

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companies making IPO of any security for Rs. 10 crore or more to do the same only in dematerialized form.

Charges:

A stock broker is required to pay a registration fee of Rs.5, 000 every financial year, if his annual turnover does not exceed Rs. 1 crore. If the turnover exceeds Rs. 1 crore during any financial year, he has to pay Rs. 5,000 plus one-hundredth of 1% of the turnover in excess of Rs.1 crore. After the expiry of five years from the date of initial registration as a broker, he has to pay Rs. 5,000 for a block of five financial years. Besides, the exchanges collect transaction charges from its trading members. NSE levies Rs. 4 per lakh of turnover. The maximum Brokerage a trading member can levy in respect of securities transactions is 2.5% of the contract price, exclusive of statutory levies like SEBI turnover fee, service tax and stamp duty. However, brokerage charges as low as0.15% are also observed in the market Trading Cycle.

Risk Management:

To pre-empt market failures and protect investors, the regulator/exchanges have developed a comprehensive risk management system, which is constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement, etc. They also administer an efficient market surveillance system to curb excessive volatility, detect and prevent price manipulations. Exchanges have setup trade/settlement guarantee funds for meeting shortages arising out of nonfulfillment/partial fulfillment of funds obligations by the members in a settlement. A clearing corporation assures the counterparty risk of each member and guarantees financial settlement in respect of trades executed on NSE.

Government Securities:

The reforms in the secondary market include Delivery versusPayment system for settling scrip less SGL transactions to reduce settlement risks, SGL Account with RBI to enable financial intermediaries to open custody (Constituent SGL) accounts and facilitate retail transactions in scrip less mode, enforcement of a trade-for-trade regime, settlement period of T+0 or T+1for all transactions undertaken directly between SGL participants and up to T+5 days for transactions routed through NSE brokers, routingtransactions through brokers of NSE, OTCEI and BSE, repos in all government securities with settlement through SGL, liquidity support to PDs to enable them to support primary market and undertake market making, special fund facility for security settlement, etc.

 As part of the ongoing efforts to build debt market infrastructure, two new systems, the Negotiated Dealing System (NDS) and the Clearing Corporation of India Limited (CCIL) commenced operations on February 15, 2002. NDS, interlaid, facilitates screen based negotiated dealing for secondary Market transactions in government securities and money market instruments, online reporting of transactions in the instruments available on the NDS and dissemination of trade information to the market. Government Securities (including T-bills), call money, notice/term money, repos in eligible securities, Commercial

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Papers and Certificate of Deposits are available for negotiated dealing through NDS among the members. The CCIL facilitates settlement of transactions in government securities (both outright and repo) on Delivery versus Payment (DvP-II) basis which provides for settlement of securities on gross basis and settlement of funds on net basis simultaneously. It acts as a central counterparty for clearing and settlement of government securities transactions done on NDS. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade. The increase in turnover took place mostly at the large big exchanges and it was partly at the cost of small exchanges that failed to keep pace with the changes. NSE is the market leader with over 80% of total turnover (volumes on all segments) in 2001-02. Top 6 stock exchanges accounted for 99.88% of turnover, while the rest 17 exchange for less than0.12% during 2002-03 (Table 5.4). About a dozen exchanges reported nil turnovers during the year.

Derivatives Market:

Trading in derivatives of securities commenced in June 2000 with the enactment of enabling legislation in early 2000. Derivatives are formally defined to include: (a) a security derived from debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security, and (b) a contract which derives its value from the prices, or index of prices, or underlying securities. Derivatives are legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. Derivatives trading commenced in India in June 2000 after SEBI granted the approval to this effect in May 2000.

SEBI permitted the derivative segment of two stock exchanges, i.e. NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivative contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these two indices and options on individual securities. The trading in index options commenced in June 2001 and trading in options on individual securities wouldcommence in July 2001 while trading in futures of individual stocks started from November 2001. In June 2003, SEBI/RBI approved the trading on interest rate derivative instruments.

The total exchange traded derivatives witnessed a volume of Rs.4, 423,333 million during 2002-03 as against Rs. 1,038,480 million during the preceding year. While NSE accounted for about99.5% of total turnover, BSE accounted for less than 1% in 2002-03. The market witnessed higher volumes from June 2001 with introduction of index options, and still higher volumes with the introduction of stock options in July 2001. There was a spurt in volumes in November 2001when stock futures were introduced. It is believed that India is the largest market in the world for stock futures.

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Unit –IIClassification of Capital market

Primary market

Secondary market

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PRIMARY MARKET

The Primary is that part of the capital that deals with the issuance of new securities. Companies, governments or  public sector institutions can obtain funding through the sale of anew stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

The primary market for equity, which consists of both the ‘initial public offering’ (IPO) market and the ‘seasoned equity offering’ (SEO) markets, experienced considerable activity in 2005 and2006 (Table 4.1). In 2006, Rs.30, 325 crore of resources were raised on this market, of whichRs.9, 918 crore were made up by 55 companies which were listed for the first time (IPOs). The number of IPOs per year has risen steadily from 2002 onwards. A level of 55 IPOs in the year translates to roughly 4 IPOs every month. The mean IPO size, which was elevated in 2005, returned to Rs.180 crore, which is similar to the value prevalent in 2003. 4.3 The primary issuance of debt securities, as per SEBI, fell to a low of around Rs. 66 crore in 2006, which is one facet of the far-reaching difficulties of the debt market.

Unlike equity securities, debt securities issued at previous dates are redeemed by companies every year. Hence, a year with allow issuance of fresh debt securities is a year in which the stock of outstanding debt securities drops. In addition to resource mobilization by the issuance of debt and equity securities, one of the most important mechanisms of financing that has been used by Indian firms is retained earnings, which are also a part of equity financing.

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SECONDARY MARKET:

Outstanding securities are traded in the secondary market, which is commonly known as stock market or stock exchange. In the secondary market, the investors can sell and buy securities. Stock markets predominantly deal in the equity shares. Debt instruments like bonds and debentures are also traded in the stock market.

Dematerialization:

Indian investor community has undergone sea changes in the past few years. India now has a very large investor population and ever increasing volumes of trades. However, this continuous growth in activities has also increased problems associated with stock trading. Most of these problems arise due to the intrinsic nature of paper based trading and settlement, like theft or loss of share certificates.

This system requires handling of huge volumes of paper leading to increased costs and inefficiencies. Risk exposure of the investor also increases due to this trading in paper.

Some of these risks are:

Delay in transfer of shares.

Possibility of forgery on various documents leading to bad deliveries, legal disputes etc.

Possibility of theft of share certificates.

Prevalence of fake certificates in the market.

Mutilation or loss of share certificates in transit.

The physical form of holding and trading in securities also acts as a bottleneck for broking community in capital market operations. The introduction of NSE and BOLT has increased the reach of capital market manifolds. The increase in number of investors participating in the capital market has increased the possibility of being hit by a bad delivery.

The cost and time spent by the brokers for rectification of these bad deliveries tends to be higher with the geographical spread of the clients. The increase in trade volumes lead to exponential rise in the back office operations thus limiting the growth potential of the broking members. The inconvenience faced by investors (in areas that are far flung and away from the main metros) in settlement of trade also limits the opportunity for such investors, especially in participating in auction trading. This has made the investors as well as broker wary of Indian capital market. In this scenario dematerialized trading is certainly a welcome move.

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What is Dematerialization?

Dematerialization or "Demat" is a process whereby your securities like shares, debentures etc, are converted into electronic data and stored in computers by a Depository. Securities registered in your name are surrendered to depository participant (DP) and these are sent to the respective companies who will cancel them after "Dematerialization" and credit your depository account with the DP. The securities on Dematerialization appear as balances in your depository account. These balances are transferable like physical shares. If at a later date, you wish to have these "demat" securities converted back into paper certificates; the Depository helps you to do this.

Depository:

Depository functions like a securities bank, where the dematerialized physical securities are traded and held in custody. This facilitates faster, risk free and low cost settlement. Depository is much like a bank and performs many activities that are similar to a bank. Following table compares the two.

NSDL and CDS

At present there are two depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services (CDS). NSDL is the first Indian depository; it was inaugurated in November 1996. NSDL was set up with an initial capital of US$28mn, promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSEIL). Later, State Bank of India (SBI) also became a shareholder.

The other depository is Central Depository Services (CDS). It is still in the process of linking with the stock exchanges. It has registered around 20 DPs and has signed up with 40 companies. It had received a certificate of commencement of business from Sebi on February 8, 1999.These depositories have appointed different Depository Participants (DP) for them. An investor can open an account with any of the depositories’ DP. But transfers arising out of trades on the stock exchanges can take place only amongst account-holders with NSDL's DPs.

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Savings

Trading in dematerialized shares results in substantial savings for the investors. Following tables gives an idea about these savings. Savings for a person who buy shares for long term investment (On a purchase of Rs10000)

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How to Rematerialize Shares.

During a Rematerialization process, the request goes from the DP to the R&T agent via NSDL. The R&T Agent, after processing the request, will print and dispatch the share certificate directly to you. No transfer duty will be charged to you when you rematerialize your shares. You have the option of rematerializing your total holdings or part of it. In addition to this, you have the option to get the certificates in market lot or jumbo lot. If your name has been wrongly spelt on the certificates given to you after a Remat, you can send it for rectification to the R&T agent along with the relevant documents.

Trading

Trading in dematerialized securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/ receipt of securities in the physical form, it is done through account transfer. An investor cannot trade in dematerialized securities through his DP. Trading at the stock exchanges can be done only through a registered trading member (broker) of the stock exchange irrespective of whether the securities are held in physical or dematerialized form.

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NSDL Charges for DPs

NSDL does not charge the investor directly but charges its DPs, who are free to charge their clients NSDL charges it’s DPs under the following heads:Transaction Fees: Market Trade: sale - nil; purchase - 5 basis points (i.e. 0.05% of the value of net receipts to clearing members account) Off Market Trade: sale - nil; purchase - 10 basis points (i.e. 0.1% of value of securities)

Custody Fees: 3.5 basis points p.a. (i.e. 0.035% p.a. of average value of securities)

Rematerialization: Rs. 10/- per certificate

Onetime payment scheme: NSDL has announced a new scheme under which, if a company makes a one-time payment of 5 basis points (0.05%) of the average market capitalization during the preceding 26 weeks, then  NSDL will not charge any custody fees to the DPs for shares of that company. Future issues by such companies would require a payment of 5 basis points on the new share capital created. The valuation for new shares will be done at the issue price. Companies would not be required to pay any additional amount, if they make a bonus issue.

Initial Public Offerings:

Credits for public offers can be directly received into demat account. In the public issue application form of depository eligible companies, there will be a provision to indicate the manner in which securities should be allotted to the applicant. All you have to do is to mention your client account number and the name and identification number of your DP. Any allotment due to you will be credited into your account. If the applicant is allotted securities in dematerialized form, but the details regarding the beneficiary account are incomplete/ wrong, the person will get physical delivery of allotted securities. If securities are allotted in the dematerialized form, these would be credited to applicant’s accountancy day between allotment date and listing date, at the discretion of the company. The issuer company/ their R&T agent will forward the applicant the allotment advice giving the number of shares allotted in dematerialized form.

Through this you can come to know that you have been allotted shares. An amendment to the company law requiring all future public issues above Rs100mn to compulsorily offer securities in dematerialized form is awaiting legislative approval. After this all the issues above Rs100mn will require investors to trade only in demat way. Partly paid up and fully paid up shares in the depository, will be given separate ISINs (International Securities Identification Number).

These are also traded separately at the stock exchanges. The company issues call notices to the beneficial holders of securities in the electronic form. The details of such beneficial holders will be provided to the issuer/ their R&T agent by NSDL. After the call money realization, issuer/ their R&T agent will electronically convert the partly paid up shares to fully paid up shares.

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Tax Aspect

In case of dematerialized holdings cost of acquisition and period of holding for calculation of capital gains tax is determined on the basis of First in First out (FIFO) method. This is as per the amendment to the Income Tax Act. The proof of the cost of acquisition will remain to be the contract note.

Demat Shares: Are They 100% Safe When you buy physical shares from the stock market, you could never be certain of the validity of the title of shares. There were many reasons- the sellers' signature did not match, or the certificates were fake, forged or stolen, and so on. Demat shares are supposed to obviate these problems. Buying shares in the demat form always guarantees you a good title as soon as the settlement is over. The biggest attraction of trading in demat shares is that the shares you buy come with a clean title and immediately after the settlement on the relevant stock exchange. Rule 100 of market regulator SEBI determines whether the shares delivered in a settlement, are good or not. Under rule 100, the shares that have been transferred any number of times can still be withdrawn by the company, if a transfer is found to be invalid for any reason.

Market index

The S&P CNX Nifty is an index based upon solid economic research. It was designed not only as barometer of market movement but also to be a foundation of the new world of financial products based on the index like index futures, index options and index funds.

A trillion calculations were expended to evolve the rules inside the S&P CNX Nifty index. The results of this work are remarkably simple:(a) the correct size to use is 50, (b) stocks considered for the S&P CNX Nifty must be liquid by the’ impact cost’ criterion, (c) the largest 50 stocks that meet the criterion go into the index. S&PCNX Nifty is a contrast to the adhoc methods that have gone into index construction in the preceding years, where indexes were made out of intuition and lacked a scientific basis.The research that led up to S&P CNX Nifty is well-respected internationally as a pioneering effort in better understanding how to make a stock market index. The Nifty is uniquely equipped as an index for the index derivatives market owing to its (a) low marke t im pac t c os t and (b ) h i gh hedg i ng e f f e c t i venes s . The good d ive r s i f i c a t i on o f Ni f ty generates low initial margin requirement. Finally, Nifty is calculated using NSE prices, the most liquid exchange in India, thus making it easier to do arbitrage for index derivatives.

Hedging effectiveness

Hedging effectiveness is a measure of the extent to which an index correlates with a portfolio, whatever the portfolio may be. Nifty correlates better with all kinds of portfolios in India as compared to other indexes. This holds good for all kinds of portfolios, not just those that contain i ndex s toc ks . N i f ty i s ow ned , compu te d and ma i n t a i ned by Ind i a Index Se rv i ce s &P roduc t s Limited (IISL), a company setup by NSE and CRISIL with technical assistance from Standard &Poor’s.

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Unit –III Instruments & players of capital market

New issue market instruments

Stock market instruments

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Products available in the Secondary and Primary Market

New issue market instruments

The term initial public offering (IPO) slipped into everyday speech during the tech bull market of the late 1990s. Back then, it seemed you couldn't go a day without hearing about a dozen new dotcom millionaires in Silicon Valley who were cashing in on their latest IPO. The phenomenon spawned the term siliconaire, which described the dotcom entrepreneurs in their early 20s and30s who suddenly found themselves living large on the proceeds from their internet companies 'IPOs.

Selling Stock

An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debtor equity. If the company has never issued equity to the public, it's known as an IPO. Companies fall into two broad categories:  private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's stand point, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there’s nothing he or she could do to stop you from buying stock.

Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rates when they issue debt.

As long as there is market demand, a public company can always issue more stock. Thus, acquisitions are easier to do because stock can be issued as part of the deal.

Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

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The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. During the cooling off period the underwriter puts together what is known as the herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a roadshow - also known as the "dog and pony show" - where the big institutional are courted. As the effective date approaches, the underwriter and company sit down and decide on the price. This isn't an easy decision: it depends on the company, the success of the road show and, most importantly, current market conditions. Of course, it's in both parties' interest to get as much as possible. Finally, the securities are sold on the stock market and the money is collected from investors.

An initial public offering (IPO) is the first sale of stock by a company to the public.

Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.

Going public raises cash and provides many benefits for a company.

The dotcom boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.

Getting in on a hot IPO is very difficult, if not impossible.

The process of underwriting involves raising money from investors by issuing new securities.

Companies hire investment banks to underwrite an IPO.

The road to an IPO consists mainly of putting together the formal documents for the Securities   and   Exchange   Commission (SEC) and selling the issue to institutional clients.

The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.

An IPO company is difficult to analyze because there isn't a lot of historical info.

Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.

Flipping may get you blacklisted from future offerings.

A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.

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Following are the main financial products/instruments dealt in the secondary market:

Equity: The ownership interest in a company of holders of its common and preferred stock. The various kinds of equity shares are as follows – Equity Shares: An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held.

Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders.

Cumulative Preference Shares. A type of preference shares on which dividendaccumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where thedividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

Security Receipts: Security receipt means a receipt or other security, issued by a securitization company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization.

Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis.

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Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/ charged against the asset of the company infamous of debenture holder.

Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows-

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.

Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.

DEBT INSTRUMENTS

To meet the long term and short term needs of finance, firms issue various kinds of Securities to the public. Securities represent claims on a stream of income and /or particular assets. Debentures are debt securities, and there is a wide range of them. Market loans are raised by the government and public sector institutions through debt securities. Equity shares issued by cooperates are ownership securities. Preference shares are a hybrid security. It is a mixture of an ownership security and debt security.

DEBENTURESa debenture is a document which either creates a debt or acknowledges it. Debenture issued by a company is in the form of a certificate acknowledging indebtedness. The debentures are issued under the Company's Common Seal. Debentures are one of a series issued to a number of lenders. The date of repayment is specified in the debentures. Debentures are issued against a charge on the assets of the Company. Debentures holders have no right to vote at the meetings of the companies.

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KINDS OF DEBENTURES

(a)Bearer Debentures:

They are registered and are payable to the bearer. They are negotiable instruments and are transferable by delivery.

(b) Registered Debentures:

They are payable to the registered holder whose name appears both on the debentures and in the Register of Debenture Holders maintained by the company. Registered Debentures can be transferred but have to be registered again. Registered Debentures are not negotiable instruments. A registered debenture contains a commitment to pay the principal sum and interest. It also has a description of the charge and a statement that it is issued subject to the conditions endorsed therein.

(c) Secured Debentures:

Debentures which create a change on the assets of the company which may be fixed or floating are known as secured Debentures. The term "bonds" and "debentures"(secured) are used interchangeably in common parlance. In USA, BOND is a long term contract which is secured, whereas a debenture is an unsecured one.

(d) Unsecured or Naked Debentures:

Debentures which are issued without any charge on assets are in secured or naked debentures. The holders are like unsecured creditors and may see the company for the recovery of debt.

(e) Redeemable Debentures:

Normally debentures are issued on the condition that they shall be redeemed after a certain period. They can however, be reissued after redemption.

(f) Perpetual Debentures:

When debentures are irredeemable they are called perpetual. Perpetual Debentures cannot be issued in India at present.

(g) Convertible Debentures:

If an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called convertible debentures. Convertible Debentures have become very popular in India. On conversion the holders cease to be lenders and become owners. Debentures are usually issued in a series with a pari passu (at the same rate) clause which entitles them to be discharged ratably though issued at different times. New series of debentures cannot rank pari passu with the old series unless the old series provides so.

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New debt instruments issued by public limited companies are participating debentures, convertible debentures with options, third party convertible debentures convertible debentures redeemable at premiums, debt equity swaps and zero coupon convertible notes. These are discussed below:

(h) Participating Debentures:

They are unsecured corporate debt securities which participate in the profits of the company. They might find investors if issued by existing dividend paying companies.

(i) Convertible Debentures with options:

They are a derivative of convertible debentures with an embedded option, providing flexibility to the issuer as well as the investor to exit from the terms of the issue. The coupon rate is specified at the time of issue.

(j) Third Party Convertible Debentures:

They are debt with a warrant allowing the investor to subscribe to the equity of third firm at a preferential price visa vis the market price. Interest rate on third party convertible debentures is lower than pure debt on account of the conversion option.

(k) Convertible-Debentures Redeemable at a Premium:

Convertible Debentures are issued at face value with 'a put option entitling investors to sell the bond to the issuer at a premium. They are basically similar to convertible debentures but embody less risk.

(I) Debt-Equity Swaps:

Debt-Equity Swaps are an offer from an issuer of debt to swap it for equity. The instrument is quite risky for the investor because the anticipated capital appreciation may not materialise.

(m) Deep discount Bonds:

They are designed to meet the long term funds requirements of the issuer and investors who are not looking for immediate return and can be sold with a long maturity of 25-30 years at a deep discount on the face value of debentures. IDBI deep discount bonds for Rs 1 lakh repayable after 25 years were sold at a discount price of Rs. 2,700.

(n) Zero-Coupon Convertible Note:

A zero-coupon convertible note can be converted into shares. If choice is exercised investors forego all accrued and unpaid interest. The zero-coupon convertible notes are quite sensitive to changes in interest rates.

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(o) Secured Premium Notes (SPN) with Detachable Warrants:

SPN which is issued along with a detachable warrant, is redeemable after a notice period, say four to seven years. The warrants attached to it ensure the holder the right to apply and get allotted equity shares; provided the SPN is fully paid.

There is a lock-in period for SPN during which no interest will be paid for an invested amount. The SPN holder has an option to sell back the SPN to the company at par value after the lock in period. If the holder exercises this option, no interest/ premium will be paid on redemption. In case the SPN holder holds its further, the holder will be repaid the principal amount along with the additional amount of interest/ premium on redemption in installments as decided by the company. The conversion of detachable warrants into equity shares will have to be done within the time limit notified by the company.

(p) Floating Rate Bonds:

The rate on the floating Rate Bond is linked to a benchmark interest rate like the prime rate in USA or LIBOR in Eurocurrency market. The State Bank of India's floating rate bond was linked to maximum interest on term deposits which was 10 percent. Floating rate is quoted in terms of a margin above or below the bench mark rate. The-floor rate in the State Bank of India case was 12 per cent. Interest rates linked to the bench mark ensure that neither the borrower nor the lender suffer from the changes in interest rates. When rates are fixed, they are likely to be inequitable to the borrower when interest rates fall subsequently, and the same bonds are likely to be inequitable to the lender when interest rates rise subsequently.

WARRANTS

A warrant is a security issued by a company granting the holder of the warrant the right to purchase a specified number of, shares at a specified price any time prior to an expiable date. Warrants may be issued with debentures or equity shares. The specific rights are set out in the warrant. The main features-of a warrant are number of shares entitled, expiry date and state price exercise price. Expiry date of warrants, generally in USA, is 5 to 10 years from the original issue date. The exercise price is 10 to 30 percent above the prevailing market price. The Warrants have a secondary market. The minimum value of a warrant represents the exchange value between the current price of the share and the shares purchased at the exercise price. Warrants have no flotation costs and when they are exercised the firm receives additional funds at a price lower than the current market, yet about those prevailing at issue time. New or growing firms and venture capitalists issue warrants. They are also issued in mergers and acquisitions. Warrants are called sweeteners and have been issued in the recent past by several companies in India. Debentures issued with warrants, like convertible debentures, carry lower coupon rates.

Non-Convertible Debentures (NCDS) With Detachable Equity Warrants The holder of NCDs with detachable equity warrants is given an option to buy a specific number of shares from the company at a predetermined price within a definite time-frame.

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The warrants attached to NCDs will be issued subject to full payment of NCD is a value. There is a specific lock-in period after which there detachable option to apply for equities. If the option to apply for equities is not exercised, the unapplied portion of shares would be disposed of by the company at its liberty.

Zero-Interest Fully Convertible Debentures (FCDS)

The investors in zero-interest fully convertible debentures will not be paid any interest. However, there is a notified period after which fully paid FCDs will be automatically and compulsorily converted into shares.

There is a lock-in period up to which no interest will be paid. Conversion is allowed only for fully paid FCDs. In the event of the company going for rights issue prior to the allotment of equity resulting from the conversion of equity shares into FCDs, FCD holders shall be offered securities as may be determined by the company.

Secured Zero-Interest Partly Convertible Debentures (PCDS) With Detachable And Separately Tradable Warrants:

This instrument has two parts; A and B. Part A is convertible into equity shares at a fixed amount on the date of allotment. Part B is non-convertible, to be redeemed at par at the end of a specific period from the date of allotment.

Fully Convertible Debentures (FCDS) With Interest (Optional)

This instrument does not yield interest in the initial period of say, 6 months. After this period option is given to the holder of FCDs to apply for equity at a "premium" for which no additional amour it needs to be paid. The option has to be indicated in the application form itself. However, interest on FCDs is payable at a determined rate from the date of first conversion to the second final conversion and in lieu of it, equity shares are issued.

OTHER DEBT SECURITIES IN VOGUE ABROAD

Income Bonds:

Here interest is paid only when cash flows are adequate. Income Bonds are like cumulative preference shares on which the fixed dividend is not paid if there is no profit in a year, but is carried forward and paid in the following year. On Income Bonds, there is no default if interest is not paid. Unlike dividend on cumulative preference shares, interest on income bond is tax-deductible. Income Bonds are issued abroad by companies in reorganization or by firms whose financial situation does not make it feasible to issue bonds with a fixed interest payment,

Asset-Backed Securities:

Assets-backed securities are a category of marketable securities that are collateral listed by financial assets such as installment loan contracts. Asset-backed financing involves a process

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called securitization. Securitization is a disintermediation process in which credit from financial intermediaries is replaced by marketable debentures that can be issued at lower cost. Financial assets are pooled so that debentures can be sold to third parties to finance the pool. Repos are the oldest asset-backed security in our country. In USA, securitization has been undertaken for insured mortgages (Ginnie Mae, 1970), mortgage backed loans, student loans (Sallie Mae 1973),trade credit receivable backed bonds (1982), equipment leasing backed bonds (1984), certificatesof automobile receivable securities (1985) and small business administration loans. Morerecently, credit card receivables have been securitized. The decade of the eighties witnessed large expansion of asset backed security financing.

Junk Bonds:

Junk Bond is a high risk, high yield bond to finance either a leveraged buyout (LBO), a merger of a company in financial distress. Coupon rates range from 16 to 25 per cent. Old line e established companies which were inefficient and. financed conservatively were objects of takeover and restructuring. To finance such take-over, high yield bonds were sold. Attractive deals were put together establishing their feasibility in terms of adequacy of cash flows to meet interest payments.Michael Milken (the JUNK BOND KING) of Drexel Buraham Lambert was the real developer of the market. The junk bond market was tarnished by the fines ($ 650 million) levied in 1989 on the investment banking firm Drexel Burnham Lambert for various Securities Law violations and thus was forced into bankruptcy in 1990 and the indictment of Milken in 1990 on charges of fraud $ 600 million fines and penalties.

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Unit –IVTrading Procedure

Electronic share trading

Process of share trading

Parties involved in trading

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Dematerialization and Electronic Transfer of Securities

Traditionally, settlement system on Indian stock exchanges gave rise to settlement risk due to the time that elapsed before trades were settled by physical movement of certificates. There were two aspects: First relating to settlement of trade in stock exchanges by delivery of shares by the seller and payment by the buyer. The stock exchange aggregated trades over a period of timeand carried out net settlement through the physical delivery of securities. The process of physically moving the securities from the seller to his broker to Clearing Corporation to the buyer’s broker and finally to the buyer took time with the risk of delay somewhere along the chain. The second aspect related to transfer of shares in favor of the purchaser by the issuer. This system of transfer of ownership was grossly inefficient as every transfer involved the physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer took much longer than the two months as stipulated in the Companies Act, and a significant proportion of transactions wound up as bad delivery due to faulty compliance of paper work.

Theft, mutilation of certificates and other irregularities were rampant, and inaddition the issuer had the right to refuse the transfer of a security. Thus the buyer did not get good title of the securities after parting with good money. All this added to the costs and delays in settlement, restricted liquidity and made investor grievance redressal time-consuming and at times intractable.

To obviate these problems, the Depositories Act, 1996 was passed to provide for theestablishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by

(a) Making securities of public limited companies freely transferable subject to certain exceptions (b) Dematerializing the securities in the depository mode(c) Providing for maintenance of ownership records in a book entry form.

A depository holds securities in dematerialized form. It maintains ownership records of securities and effects transfer of ownership through book entry. By fiction of law, it is the registered owner of the securities held with it with the limited purpose of effecting transfer of ownership at the behest of the owner. The name of the depository appears in the records of the issuer as registered owner of securities. The name of actual owner appears in the records of the depository as beneficial owner. The beneficial owner has all the rights and liabilities associated with the securities. The owner of securities intending to avail of depository services opens an account with a depository through a depository participant (DP). The Securities are transferred from one account to another through book entry only on the instructions of the beneficial owner. In order to promote dematerialization of securities, NSE joined hands with leading financial institutions to establish the National Securities Depository Ltd. (NSDL), the first depository in the country, with the objective of enhancing the efficiency in settlement systems as also toreduce the menace of fake/forged and stolen securities.  TRADING PROCEDURE

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Neat System

The NEAT system supports an order driven market, wherein orders match on the basis of time and price priority. All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded is notified by the Exchange from time to time.

Market Types

The Capital Market system has four types of market.

Normal Market

Normal market consists of various book types wherein orders are segregated as Regular Lot Orders, Special Term Orders, Negotiated Trade Orders and Stop Loss Orders depending on their order attributes.

Odd Lot Market

The odd lot market facility is used for the Limited Physical Market. The main features of the Limited Physical Market are detailed in a separate section (1.14).

RETDEBT Market

The RETDEBT market facility on the NEAT system of capital market segment is used or transactions in Retail Debt Market session. Trading in Retail Detail Market takes place in the same manner as in equities (capital market) segment. The main features of this market are detailed in a separate section (1.15) on RETDEBT market.

Auction Market

In the Auction market, auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. The main features of this market are detailed in a separate section (1.13) on auction.

Entering Orders

The trading member can enter orders in the normal market, odd lot, RETDEBT and auction market. A user can place orders in any of the above mentioned markets by invoking the respective order entry screens. After doing so, the system automatically picks up information from the last invoked screen (e.g. Market Watch/MBP/OO/SQ and Security List).

Price Bands

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Daily price bands are applicable on securities as below: Daily price bands of 2% (either way) on securities as specified by the Exchange. Daily price bands of 5% (either way) on securities as specified by the Exchange. Daily price bands of 10% (either way) on securities as specified by the Exchange. No price bands are applicable on: scrips on which derivative products are available or scrip included in indices on which derivative products are available. In order to prevent members from entering orders at non-genuine prices in such securities, the Exchange has fixed operating range of 20% for such securities. Price bands of 20% (either way) on all remaining scrips (including debentures, warrants, preference shares etc.). The price bands for the securities in the Limited Physical Market are the same as those applicable for the securities in the Normal Market. For auction market the price bands of 20% are applicable. Order Types and Conditions the system allows the trading members to enter orders with various conditions attached to themes per their requirements. These conditions are broadly divided into Time Conditions, Quantity Conditions, Price Conditions and Other Conditions. Several combinations of the above are allowed thereby providing enormous flexibility to the users. The order types and conditions are summarized below:

A DAY order, as the name suggests is an order that is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day. By default, the system assumes that all orders entered are Day orders.

Order Modification

All orders can be modified in the system till the time they do not get fully traded and only during market hours. Once an order is modified, the branch order value limit for the branch gets adjusted automatically. Following is the corporate hierarchy for performing order modification functionality:• A dealer can modify only the orders entered by him.• A branch manager can modify his own orders or orders of any dealer under his branch.• A corporate manager can modify his own orders or orders of all dealers and branch managers of the trading member firm.

However, the corporate manager/branch manager cannot modify order details such that itexceeds the branch order value limit set for the day. Order modification cannot be performed by/for a trading member who is suspended or de-activated by the Exchange for any reason. A buyback having ‘BUYBACKORD’ in the client account field cannot be modified to any other client account. Any order modifications resulting in price or quantity freeze shall not be allowed. The user will receive a message "CFO Request Rejected' for such modification requests.

Order Cancellation

Order cancellation functionality can be performed only for orders which have not been fully or partially traded (for the untraded part of partially traded orders only) and only during market hours. Single Order Cancellation Single order cancellation can be done during trading hours either by selecting the order from the outstanding order screen or from the function key provided. Order cancellation functionality is available for all book types. But the user is not allowed to cancel auction initiation and competitor orders in auction market. Order cancellation is also not allowed for those negotiated trade orders that have not resulted as an alert. Quick

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Order Cancellation Quick Order Cancellation (Cancel All) is an extension of Single Order Cancellation enabling a user to cancel multiple outstanding orders in various trading books subject to the corporate hierarchy. The different filters available for canceling orders by using quick order cancellation facility are symbol, series, book type, branch, user, PRO/CLI/WHS, client account number and buy/sell. Quick order cancellation can be performed by invoking the function key provided and cannot be done from the outstanding orders screen. If the criteria are not found to be correct by trading member then an error message is displayed and the focus is set on the incorrect field tenable the user to correct it. If the selection criteria are correct then a message appears on the quick order cancellation screen stating the number of buy and sell orders to be cancelled. Quick order cancellation can be done only during market hours.

Order Cancellation for Disabled Member

The Exchange disables a member from trading due to various reasons. In case a member is disabled from trading by the Exchange, all pending orders in all books except for Negotiated Trade orders of the member are immediately cancelled by the system. A message: “Order Number .......... cancelled due to suspension” is displayed at the message window screen at the trader workstation. Inquiry screens such as MBP, Market Watch and trader specific screens such as Outstanding Orders, Activity Log etc. get updated accordingly.

Internet Broking

SEBI Committee has approved the use of Internet as an Order Routing System (ORS) for communicating clients' orders to the exchanges through brokers. ORS enables investors to place orders with his broker and have control over the information and quotes and to hit the quote on an on-line basis. Once the broker’s system receives the order, it checks the authenticity of the client electronically and then routes the order to the appropriate exchange for execution. On execution of the order, it is confirmed on real time basis. Investor receives reports on margin requirement, payments and delivery obligations through the system. His ledger and portfolio account get updated online. NSE launched internet trading in early February 2000. It is the first stock exchange in the country to provide web-based access to investors to trade directly on the exchange. The orders originating from the PCs of the investors are routed through the Internet to the trading terminals of the designated brokers with whom they are connected and further to the exchange for trade execution. Soon after these orders get matched and result into trades, the investors get confirmation about them on their PCs through the same internet route.

Wireless Application Protocol (WAP)

SEBI has also approved trading through wireless medium on WAP Platform. NSE.IT launched the Wireless Application Protocol (WAP) in November 2000. This provides access to its order book through the hand held devices, which use WAP technology. This serves primarily retail investors who are mobile and want any place when the market prices for stocks at their choice are attractive. Only SEBI registered members who have been granted permission by the Exchange for providing Internet based trading services can introduce the service after obtaining permission from the Exchange.

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Unit –V

Legal frame work of capital market

Regulatory authority of capital market

SEBI guidelines

Securities Contract and Regulations Act

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LEGAL FRAMEWORK

This section deals with legislative and regulatory provisions relevant from the viewpoint of a trading member.

The four main legislations governing the securities market are:(a) the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; (b) the Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues; (c) the SEBI Act, 1992 which establishes SEBI to protect investors and develop and regulate securities market; and (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of dematerialized securities.

Legislations

Capital Issues (Control) Act, 1947The Act had its origin during the war in 1943 when the objective was to channel resources to support the war effort. It was retained with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled into proper lines, i.e., for desirable purposes to serve goals and priorities of the government, and to protect the interests of investors. Under the Act, any firm wishing to issue securities had to obtain approval from the Central Government, which also determined the amount, type and price of the issue. As a part of the liberalization process, the Act was repealed in 1992 paving way for market determined allocation of resources.

Securities Contracts (Regulation) Act, 1956It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government. Organized trading activity in securities takes place on a specified recognized stock exchange. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the Rules.

SEBI Act, 1992The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. It has powers to register and regulate all market intermediaries and also to penalize them in case of violations of the provisions of the Act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market.

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Depositories Act, 1996The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the company’s right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with.

Companies Act, 1956It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information.

Rules and RegulationsThe Government has framed rules under the SC(R) A, SEBI Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for prevention of unfair trade practices, insider trading, etc. Under these Acts, Government and SEBI issue notifications, guidelines, and circulars, which need to be complied with by market participants. The self-regulatory organizations (SROs) like stock exchanges have also laid down their rules of game.

Securities Contracts (Regulation) Act, 1956The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The definitions of some of the important terms are given below:

‘Recognized Stock Exchange’ means a stock exchange, which is for the time being recognized by the Central Government under Section 4 of the SC(R) A

‘Stock Exchange’ means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

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As per Section 2(h), the term "securities" include-

(I) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate,

(ii) Derivative,

(iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes,

(iv)Security receipts

(v) Government securities,

(vi)Such other instruments as may be declared by the Central Government to be securities, and

(vii) Rights or interests in securities.

As per section 2(AA), “Derivative” includes-

A. a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security;

B. a contract which derives its value from the prices, or index of prices, of underlying securities;

Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are-

(i) Traded on a recognized stock exchange;

(ii) Settled on the clearing house of the recognized stock exchange, in accordance with the rules and bye-laws of such stock exchanges.

"Spot delivery contract" has been defined in Section 2(i) to mean a contract which provides for-

(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(b) Transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

The SC(R) A deals with-

1. Stock exchanges, through a process of recognition and continued supervision,

2. Contracts in securities, and

3. Listing of securities on stock exchanges.

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Securities Contracts (Regulation) Rules, 1957The Central Government has made Securities Contracts (Regulation) Rules, 1957, as required by sub-section (3) of the Section 30 of the Securities Contracts (Regulation) Act, 1956 for carrying out the purposes of that Act. The powers under the SC(R) R, 1957 are exercisable by SEBI.

Contracts between members of recognized stock exchangeAll contracts between the members of a recognized stock exchange shall be confirmed in writing and shall be enforced in accordance with the rules and byelaws of the stock exchange of which they are members (Rule 9). Books of account and other documents to be maintained and preserved by every member of a recognized stock exchange:

(i) Every member of a recognized stock exchange shall maintain and preserve the following books of account and documents for a period of five years:

(a) Register of transactions (Sauda book).

(b) Clients' ledger.

(c) General ledger.

(d) Journals.

(e) Cash book.

(f) Bank pass-book.

(g) Documents register showing full particulars of shares and securities received and delivered.

(2) Every member of a recognized stock exchange shall maintain and preserve the following documents for a period of two years:

(a) Members' contract books showing details of all contracts entered into by him with other members of the same exchange or counter-foils or duplicates of memos of confirmation issued to such other members.

(b) Counter-foils or duplicates of contract notes issued to clients.

(c) Written consent of clients in respect of contracts entered into as principals. (Rule 15)

Constitution of SEBIThe Central Government has constituted a Board by the name of SEBI under Section 3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other places in India.

SEBI consists of the following members, namely:-

(a) A Chairman;

(b) Two members from amongst the officials of the Ministries of the Central Government dealing with Finance and administration of Companies Act, 1956;

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(c) One member from amongst the officials of the Reserve Bank of India;

(d) five other members of whom at least three shall be whole time members to be appointed by the Central Government.

The general superintendence, direction and management of the affairs of SEBI vests in a Board of Members, which exercises all powers and do all acts and things which may be exercised or done by SEBI. The Chairman and the other members are from amongst the persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to SEBI.

Functions of SEBI SEBI has been obligated to protect the interests of the investors in securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. The measures referred to therein may provide for:-

(a) Regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of 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 and such other intermediaries who may be associated with securities markets in any manner;

(c) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf;

(d) Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds;

(e) Promoting and regulating self-regulatory organizations;

(f) Prohibiting fraudulent and unfair trade practices relating to securities markets;

(g) Promoting investors' education and training of intermediaries of securities markets;

(h) Prohibiting insider trading in securities;

(i) Regulating substantial acquisition of shares and take-over of companies;

(j) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self- regulatory organizations in the securities market;

(k) calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board;

(l) Performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;

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(m) Levying fees or other charges for carrying out the purpose of this section;

(n) Conducting research for the above purposes;

(o) Calling from or furnishing to any such agencies, as may be specified by SEBI, such information as may be considered necessary by it for the efficient discharge of its functions;

(p) Performing such other functions as may be prescribed.

SEBI may, for the protection of investors, (a) specify, by regulations, (i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and (ii) the manner in which such matters, shall be disclosed by the companies and (b) by general or special orders, (i) prohibit any company from issuing of prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities, (ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited may be issued (Section 11A).

SEBI may issue directions to any person or class of persons referred to in section 12, or associated with the securities market or to any company in respect of matters specified in section 11A. if it is in the interest of investors, or orderly development of securities market to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market to secure the proper management of any such intermediary or person (Section 11B).

Registration of IntermediariesThe intermediaries and persons associated with securities market shall buy sell or deal in securities after obtaining a certificate of registration from SEBI, as required by Section 12:

1) Stock-broker,

2) Sub- broker,

3) Share transfer agent,

4) Banker to an issue,

5) Trustee of trust deed,

6) Registrar to an issue,

7) Merchant banker,

8) Underwriter,

9) Portfolio manager,

10) Investment adviser

11) Depository,

12) Depository Participant

13) Custodian of securities,

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14) Foreign institutional investor,

15) Credit rating agency or

16) Collective investment schemes,

17) Venture capital funds,

18) Mutual fund, and

19) Any other intermediary associated with the securities market

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating To Securities Markets) Regulations, 1995The SEBI (Prohibition of Fraudulent and Unfair Trade Practices in relation to the Securities Market) Regulations, 1995 enable SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, unfair trade practices relating to securities. SEBI can conduct investigation, suo motto or upon information received by it, by an investigating officer in respect of conduct and affairs of any person dealing, buying/selling/dealing in securities. Based on the report of the investigating officer, SEBI can initiate action for suspension or cancellation of registration of an intermediary.

The term “fraud” has been defined by Regulation 2(1) (c). Fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:-

1. The suggestion, as to a fact which is not true, by one who does not believe it to be true;

2. The active concealment of a fact by one having knowledge or belief of the fact;

3. A promise made without any intention of performing it;

4. Any other act fitted to deceive; and

5. Any such act or omission as the law specially declares to be fraudulent; and ‘fraudulent’ shall be construed accordingly.

The regulation prohibits:

(1) Dealings in securities in a fraudulent manner,

(2) Market manipulation,

(3) Misleading statements to induce sale or purchase of securities, and

(4) Unfair trade practice relating to securities

PAN compulsory for Securities transaction

The Income-tax (Eighth Amendment) Rules, 2002 made it mandatory for a person to quote permanent account numbers (PAN), issued by the income tax department, for securities transactions of over Rs. 1 lakh.

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Tax on long-term capital gains (Section 112)Where the total income of an assesse includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head ‘Capital gains’, the tax payable by the assesses on the total income shall be the aggregate of,-

(a) In the case of an individual or a Hindu undivided family, being a resident,-

i. the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

ii. The amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent:

(b) In the case of a domestic company,-

I. the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

ii. The amount of income-tax calculated on such long-term capital gains at the rate of [twenty] per cent:

(c) In the case of a non-resident (not being a company) or a foreign company,-

i. the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains , had the total income as so reduced been its total income; and

ii. The amount of income-tax calculated on such long-term capital gains at the rate of twenty percent;

(d) In any other case of a resident,-

i. the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income.

ii. the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent Where the gross total income of an assessee includes any income arising from the transfer of a long term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee. Where the total income of an assessee includes any income arising from the Transfer of a long-term capital asset, the total income shall be reduced by the amount of such income and the rebate under section 88 shall be allowed from the income-Tax on the total income as so reduced.

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Unit –VI

Clearing and settlement procedures

Process of clearing and settlement

Parties involved in clearing and settlement

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CLEARING AND SETTLEMENT

Transaction Cycle

Settlement Process

While NSE provides a platform for trading to its trading members, the National Securities Clearing Corporation Ltd. (NSCCL) determines the funds/securities obligations of the trading members and ensures that trading members meet their obligations. NSCCL becomes the legal counterparty to the net settlement obligations of every member. This principle is called ``novation'' and NSCCL is obligated to meet all settlement obligations, regardless of member defaults, without any discretion. Once a member fails on any obligations, NSCCL immediately cuts off trading and initiates recovery. The clearing banks and depositories provide the necessary interface between the custodians/clearing members (who clear for the trading members or their own transactions) for settlement of funds/securities obligations of trading members. The core processes involved in the settlement process are:

(a) Determination of Obligation: NSCCL determines what counter-parties owe, and what counter-parties are due to receive on the settlement date. The NSCCL interposes itself as a central counterparty between the counterparties to trades and nets the positions so that a member has security wise net obligation to receive or deliver a security and has to either pay or receive funds.

(b) Pay-in of Funds and Securities: The members bring in their funds/securities to the NSCCL. They make available required securities in designated accounts with the depositories by the prescribed pay-in time. The depositories move the securities available in the accounts of members to the account of the NSCCL. Likewise members with funds obligations make available required funds in the designated accounts with clearing banks by the prescribed pay-in

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Transaction cycle

Decision to trade

Settlement of trades

Funds/

Securities

Clearing of trades

Placing order

Trade execution

time. The NSCCL sends electronic instructions to the clearing banks to debit member’s accounts to the extent of payment obligations. The banks process these instructions, debit accounts of members and credit accounts of the NSCCL.

(c) Pay-out of Funds and Securities: After processing for shortages of funds/securities and arranging for movement of funds from surplus banks to deficit banks through RBI clearing, the NSCCL sends electronic instructions to the depositories/clearing banks to release pay-out of securities/funds. The depositories and clearing banks debit accounts of NSCCL and credit settlement accounts of members. Settlement is complete upon release of pay-out of funds and securities to custodians/members. The settlement process for transactions in securities in the CM segment of NSE is presented in the Figure 3.2

(d) Risk Management: A sound risk management system is integral to an efficient settlement system. NSCCL has put in place a comprehensive risk management system, which is constantly monitored and upgraded to pre-empt market failures. It monitors the track record and performance of members and their net worth; undertakes on-line monitoring of members’ positions and exposure in the market collects margins from members and automatically disables members if the limits are breached.

3.3 Settlement AgenciesThe NSCCL, with the help of clearing members, custodians, clearing banks and depositories settles the trades executed on exchanges. The roles of each of these entities are explained below:

(a) NSCCL: The NSCCL is responsible for post-trade activities of a stock exchange. Clearing and settlement of trades and risk management are its central functions. It clears all trades, determines obligations of members, arranges for pay-in of funds/securities, receives funds/securities, processes for shortages in funds/securities, arranges for pay-out of funds/securities to members, guarantees settlement, and collects and maintains margins/collateral/base capital/other funds.

(b) Clearing Members: They are responsible for settling their obligations as determined by the NSCCL. They have to make available funds and/or securities in the designated accounts with clearing bank/depository participant, as the case may be, to meet their obligations on the settlement day. In the capital market segment, all trading members of the Exchange are required to become the Clearing Member of the Clearing Corporation. (c) Custodians: A custodian is a person who holds for safekeeping the documentary evidence of the title to property belonging like share certificates, etc. The title to the custodian’s property remains vested with the original holder, or in their nominee(s), or custodian trustee, as the case may be. In NSCCL, custodian is a clearing member but not a trading member. He settles trades assigned to him by trading members. He is required to confirm whether he is going to settle a particular trade or not. If it is confirmed, the NSCCL assigns that obligation to that custodian and the custodian is required to settle it on the settlement day. If the custodian rejects the trade, the obligation is assigned back to the trading /clearing member.

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Explanations:

(1) Trade details from Exchange to NSCCL (real-time and end of day trade file).

(2) NSCCL notifies the consummated trade details to CMs/custodians who affirm back. Based on the affirmation, NSCCL applies multilateral netting and determines obligations.

(3) Download of obligation and pay-in advice of funds/securities.

(4) Instructions to clearing banks to make funds available by pay-in time.

(5) Instructions to depositories to make securities available by pay-in-time.

(6) Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs and credit its account and depository does it).

(7) Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs and credit its account and clearing bank does it).

(8) Pay-out of securities (NSCCL advises depository to credit pool account of custodians/CMs and debit its account and depository does it).

(9) Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and clearing bank does it).

(10) Depository informs custodians/CMs through DPs.

(11) Clearing Banks inform custodians/CMs.

(d) Clearing Banks: Clearing banks are a key link between the clearing members and NSCCL for funds settlement. Every clearing member is required to open a dedicated settlement account with one of the clearing banks. Based on his obligation as determined through clearing, the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out. Multiple clearing banks provide advantages of competitive forces, facilitate introduction of new products viz. working capital funding, anywhere banking facilities, the option to members to settle funds through a bank, which provides the maximum services suitable to the member. The clearing banks are required to provide the following services as a single window to all clearing members of National Securities Clearing Corporation Ltd. as also to the Clearing Corporation:

• Branch network in cities that cover bulk of the trading cum clearing members

• High level automation including electronic funds transfer (EFT) facilities

• Facilities like (a) dedicated branch facilities (b) software to interface with the Clearing Corporation (c) access to accounts information on a real time basis

• Value-added services to members such as free-of-cost funds transfer across centers etc.

• Providing working capital funds

• Stock lending facilities

• Services as Professional Clearing Members

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(e) Depositories: A depository is an entity where the securities of an investor are held in electronic form. The person who holds a demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account. Depositories help in the settlement of the dematerialized securities. Each custodian/clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL. As per the schedule of allocation of securities determined by the NSCCL, the depositories transfer the securities on the pay-out day from the account of the NSCCL to those of members/custodians.

(f) Professional Clearing Member: NSCCL admits special category of members namely, professional clearing members. Professional Clearing Member (PCM) may clear and settle trades executed for their clients (individuals, institutions etc.). In such an event, the functions and responsibilities of the PCM would be similar to Custodians. PCMs may also undertake clearing and settlement responsibility for trading members. In such a case, the PCM would settle the trades carried out by the trading members connected to them. The onus for settling the trade would be thus on the PCM and not the trading member. A PCM has no trading rights but has only clearing rights, i.e. he just clears the trades of his associate trading members and institutional clients.

3.5 Settlement CycleAt the end of each trading day, concluded or locked-in trades are received from NSE by NSCCL. NSCCL determines the cumulative obligations of each member and electronically transfers the data to Clearing Members (CMs). All trades concluded during a particular trading period are settled together. A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of CMs. NSCCL then allocates or assigns delivery of securities inter se the members to arrive at the delivery and receipt obligation of funds and securities by each member. On the securities pay-in day, delivering members are required to bring in securities to NSCCL. On pay out day the securities are delivered to the respective receiving members. Settlement is deemed to be complete upon declaration and release of pay-out of funds and securities. Exceptions may arise because of short delivery of securities by CMs, bad deliveries or company objections on the pay-out day. NSCCL identifies short deliveries and conducts a buying-in auction on the day after the pay-out day through the NSE trading system. The delivering CM is debited by an amount equivalent to the securities not delivered and valued at a valuation price (the closing price as announced by NSE on the day previous to the day of the valuation). If the buy-in auction price is more than the valuation price, the CM is required to make good the difference. All shortages not bought-in are deemed closed out at the highest price between the first day of the trading period till the day of squaring off or closing price on the auction day plus 20%, whichever is higher. This amount is credited to the receiving member's account on the auction pay-out day.

Company Objections (in case of physical settlement)

Company objections arise when, on lodgment of the securities with the company/Share Transfer Agent (STA) for transfers, which are returned due to signature mismatch or for any other reason for which the transfer of security cannot be affected. The original selling CM is normally

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responsible for rectifying/replacing defective documents to the receiving CM as per pre-notified schedule. The CM on whom company objection is lodged has an opportunity to withdraw the objection if the objection is not valid or the documents are incomplete (i.e. not as required under guideline No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of lodgment against him. If the CM is unable to rectify/replace defective documents on or before 21 days, NSCCL conducts a buying-in auction for the non-rectified part of defective document on the next auction day through the trading system of NSE. All objections, which are not bought-in, are deemed closed out on the auction day at the closing price on the auction day plus 20%. This amount is credited to the receiving member's account on the auction pay-out day. Till June, 2001 trades were settled as account period settlement. Following Finance Minister’s announcement on March 13, 2001 that the rolling settlement would be extended to 200 category ‘A’ stocks in MCFS, ALBM and BLESS by July, 2001, SEBI decided that all 263 scrip’s included in the ALBM/BLESS or MCFS in any stock exchange or in the BSE-200 list would be traded only in the compulsory rolling settlement on all the exchanges from July 2, 2001. Further, SEBI mandated rolling settlement for the remaining securities from December 31, 2001. The settlement cycle would be reduced from T+5 to T+3 from April 1, 2002. With effect from April 1, 2003 the settlement cycle has been further reduced from T+3 to T+2.

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Conformation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Valuation of shortages based on closing prices T+1 closing prices

Post settlement

Auction T+3 working days

Bad delivery reporting T+4 working days

Auction settlement T+5 working days

Rectified bad delivery pay in and pay out T+6 working days

Re-bad delivery reporting and pick up T+8 working days

Close out of re-bad delivery and funds pay-in & pay out T+9 working days

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Limited Physical Market

Settlement for trades is done on a trade-for-trade basis and delivery obligations arise out of each trade.

Salient features of Limited Physical Market settlement.

• Delivery of shares in street name and market delivery (clients holding physical shares purchased from the secondary market) is treated as bad delivery. The shares standing in the name of individuals/HUF only would constitute good delivery. The selling/delivering member must necessarily be the introducing member.

• Any delivery in excess of 500 shares is marked as short and such deliveries are compulsorily closed-out.

• Shortages, if any, are compulsorily closed-out at 20% over the actual traded price. Unrectified bad delivery and re-bad delivery are compulsorily closed out at 20% over the actual traded price.

• All deliveries are compulsorily be required to be attested by the introducing/ delivering member.

• The buyer must compulsorily send the securities for transfer and dematerialization, latest within 3 months from the date of pay-out.

• Company objections arising out of such trading and settlement in this market are reported in the same manner as is currently being done for normal market segment. However securities would be accepted as valid company objection, only if the securities are lodged for transfer within 3 months from the date of pay-out.

1. Misconduct: A trading member shall be deemed guilty of misconduct for any of the following or similar acts or omissions namely:

(a) Fraud: If it is convicted of a criminal offence or commits fraud or a fraudulent act which in the opinion of the relevant authority renders it unfit to be a trading member;

(b) Violation: If it has violated provisions of any statute governing the activities, business and operations of the Exchange, trading members and securities business in general;

(c) Improper Conduct: If in the opinion of the relevant authority it is guilty of dishonorable or disgraceful or disorderly or improper conduct on the Exchange or of willfully obstructing the business of the Exchange;

(d) Breach of Rules, Bye Laws and Regulations: If it shields or assists or omits to report any trading member whom it has known to have committed a breach or evasion of any Rule, Bye-law and Regulation of the Exchange or of any resolution, order, notice or direction thereunder of the relevant authority or of any Committee or officer or the Exchange authorized in that behalf;

(e) Failure to comply with Resolutions: If it contravenes or refuses or fails to comply with or abide by any resolution, order, notice, direction, decision or ruling of the relevant authority or of any Committee or officer of the Exchange or other person authorized in that behalf under the Bye Laws, Rules and Regulations of the Exchange;

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(f) Failure to submit to or abide by Arbitration: If it neglects or fails or refuses to submit to arbitration or to abide by or carry out any award, decision or order of the relevant authority or the Arbitration Committee or the arbitrators made in connection with a reference under the Bye Laws, Rules and Regulations of the Exchange;

(g) Failure to testify or give information: If it neglects or fails or refuses to submit to the relevant authority or to a Committee or an officer of the Exchange authorized in that behalf, such books, correspondence, documents and papers or any part thereof as may be required to be produced or to appeal and testify before or cause any of its partners, attorneys, agents, authorized representatives or employees to appear and testify before the relevant authority or such Committee or officer of the Exchange or other person authorized in that behalf;

(h) Failure to submit Special Returns: If it neglects or fails or refuses to submit to the relevant authority within the time notified in that behalf special returns in such form as the relevant authority may from time to time prescribe together with such other information as the relevant authority may require whenever circumstances arise which in the opinion of the relevant authority make it desirable that such special returns or information should be furnished by any or all the trading members;

(i) Failure to submit Audited Accounts: If it neglects or fails or refuses to submit its audited accounts to the Exchange within such time as may be prescribed by the relevant authority from time to time,

(j) Failure to compare or submit accounts with Defaulter: If it neglects or fails to compare its accounts with the Defaulters' Committee or to submit to it a statement of its accounts with a defaulter or a certificate that it has no such account or if it makes a false or misleading statement therein;

(k) False or misleading Returns: If it neglects or fails or refuses to submit or makes any false or misleading statement in its clearing forms or returns required to be submitted to the Exchange under the Bye Laws, Rules and Regulations;

(l) Vexatious complaints: If it or its agent brings before the relevant authority or a Committee or an officer of the Exchange or other person authorized in that behalf a charge, complaint or suit which in the opinion of the relevant authority is frivolous, vexatious or malicious;

(m) Failure to pay dues and fees: If it fails to pay its subscription, fees, arbitration charges or any other money which may be due by it or any fine or penalty imposed on it.

2. Un-businesslike Conduct: A trading member shall be deemed guilty of business like conduct for any of the following or similar acts or omissions namely:

(a) Fictitious Names: If it transacts its own business or the business of its constituent in fictitious names or if he carries on business in more than one trading segment of the Exchange under fictitious names;

(b) Fictitious Dealings: If it makes a fictitious transaction or gives an order for the purchase or sale of securities the execution of which would involve no change of ownership or executes such an order with knowledge of its character?

(c) Circulation of rumors: If it, in any manner, circulates or causes to be circulated, any rumors;

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(d) Prejudicial Business: If it makes or assists in making or with such knowledge is a party to or assists in carrying out any plan or scheme for the making of any purchases or sales or offers of purchase or sale of securities for the purpose of upsetting the equilibrium of the market or bringing about a condition in which prices will not fairly reflect market values;

(e) Market Manipulation and Rigging: If it, directly or indirectly, alone or with other persons, effects series of transactions in any security to create actual or apparent active trading in such security or raising or depressing the prices of such security for the purpose of inducing purchase or sale of such security by others;

(f) Unwarrantable Business: If it engages in reckless or unwarrantable or unbusiness like dealings in the market or effects purchases or sales for its constituent's account or for any account in which it is directly or indirectly interested which purchases or sales are excessive in view of its constituent's or his own means and financial resources or in view of the market for such security;

(g) Compromise: If it connives at a private failure of a trading member or accepts less than a full and bona fide money payment in settlement of a debt due by a trading member arising out of a transaction in securities;

(h) Dishonored Cheque: If it issues to any other trading member or to its constituents a cheque which is dishonored on presentation for whatever reasons;

(i) Failure to carry out transactions with Constituents: If it fails in the opinion of the relevant authority to carry out its committed transactions with its constituents;

3. Unprofessional Conduct: A trading member shall be deemed guilty of unprofessional conduct for any of the following or similar acts or omissions namely:

(a) Business in Securities in which dealings not permitted: If it enters into dealings in

Securities in which dealings are not permitted;

(b) Business for Defaulting Constituent: If it deals or transacts business directly or indirectly or executes an order for a constituent who has within its knowledge failed to carry out engagements relating to securities and is in default to another trading member unless such constituent shall have made a satisfactory arrangement with the trading member who is its creditor;

(c) Business for Insolvent: If without first obtaining the consent of the relevant authority it directly or indirectly is interested in or associated in business with or transacts any business with or for any individual who has been bankrupt or insolvent even though such individual shall have obtained his final discharge from an Insolvency Court;

(d) Business without permission when under suspension: If without the permission of

The relevant authority it does business on its own account or on account of a principal with or through a trading member during the period it is required by the relevant authority to suspend business on the Exchange;

(e) Business for or with suspended, expelled and defaulter trading members: If without the special permission of the relevant authority it shares brokerage with or carries on business or

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makes any deal for or with any trading member who has been suspended, expelled or declared a defaulter;

(f) Business for Employees of other trading members: If it transacts business directly or indirectly for or with or executes an order for an authorized representative or employee of another trading member without the written consent of such employing trading member;

(g) Business for Exchange Employees: If it makes a speculative transaction in which an employee of the Exchange is directly or indirectly interested;

(h) Advertisement: If it advertises for business purposes or issue regularly circular or other business communications to persons other than its own constituents, trading members of the Exchange, Banks and Joint Stock Companies or publishes pamphlets, circular or any other literature or report or information relating to the stock markets with its name attached;

(i) Evasion of Margin Requirements: If it willfully evades or attempts to evade or assists in evading the margin requirements prescribed in these Bye Laws and Regulations;

(j) Brokerage Charge: If it willfully deviates from or evades or attempts to evade the Bye Laws and Regulations relating to charging and sharing of brokerage.

(k) Dealings with entities prohibited to buy or sell or deal in securities market. If it deals, directly or indirectly, in the course of its business with or transacts any business with or for any entity, which has been prohibited by SEBI to buy or sell or deal in the securities market.

4. Trading member’s responsibility for Partners, Agents and Employees: A trading member shall be fully responsible for the acts and omissions of its authorized officials, attorneys, agents, authorized representatives and employees and if any such act or omission be held by the relevant authority to be one which if committed or omitted by the trading member would subject it to any of the penalties as provided in the Bye Laws, Rules and Regulations of the Exchange then such trading member shall be liable therefore to the same penalty to the same extent as if such act or omission had been done or omitted by itself.

5. Suspension on failure to provide margin deposit and/or Capital Adequacy requirements: The Exchange shall require a trading member to suspend its business when it fails to provide the margin deposit and/or meets capital adequacy norms as provided in the Bye Laws, Rules and Regulations and the suspension of business shall continue until it furnishes the necessary margin deposit or meet capital adequacy requirements. The relevant authority may expel a trading member acting in contravention of this provision.

6. Suspension of Business: The relevant authority may require a trading member to suspend its business in part or in whole:

(a) Prejudicial Business: When in the opinion of the relevant authority, the trading member conducts business in a manner prejudicial to the Exchange by making purchases or sales of securities or offers to purchase or sell securities for the purpose of upsetting equilibrium of the market or bringing about a condition of demoralization in which prices will not fairly reflect market values, or(b) Unwarrantable Business: When in the opinion of the relevant authority it engages in unwarrantable business or effects purchases or sales for its constituent's account or for any account in which it is directly or indirectly interested which purchases or sales are excessive in view of its constituent's or its own means and financial resources or in view of the market for

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such security, (c) Unsatisfactory Financial Condition: When in the opinion of the relevant authority it is in such financial condition that it cannot be permitted to do business with safety to its creditors or the Exchange.

7. Removal of Suspension: The suspension of business as above shall continue until the trading member has been allowed by the relevant authority to resume business on its paying such deposit or on its doing such act or providing such thing as the relevant authority may require.

8. Consequence of Suspension: The suspension of a trading member shall have the following consequences namely:

(a) Suspension of Membership Rights : The suspended trading member shall during the terms of its suspension be deprived of and excluded from all the rights and privileges of membership including the right to attend or vote at any meeting of the general body of trading members of the relevant segment, but it may be proceeded against by the relevant authority for any offence committed by it either before or after its suspension and the relevant authority shall not be debarred from taking cognizance of and adjudicating on or dealing with any claim made against it by other trading members;

(b) Rights of creditors unimpaired: The suspension shall not affect the rights of the trading members who are creditors of the suspended trading member;

(c) Fulfillment of Contracts: The suspended trading member shall be bound to fulfill contracts outstanding at the time of its suspension;

(d) Further business prohibited : The suspended trading member shall not during the terms of its suspension make any trade or transact any business with or through a trading member provided that it may with the permission of the relevant authority close with or through a trading member the transactions outstanding at the time of its suspension;

(e) Trading members not to deal: No trading member shall transact business for or with or share brokerage with a suspended trading member during the terms of its suspension except with the previous permission of the relevant authority.

9. Consequences of Expulsion: The expulsion of a trading member shall have the following consequences namely:

(a) Trading membership rights forfeited: The expelled trading member shall forfeit to the Exchange its right of trading membership and all rights and privileges as a trading member of the Exchange including any right to the use of or any claim upon or any interest in any property or funds of the Exchange but any liability of any such trading member to the Exchange or to any trading member of the Exchange shall continue and remain unaffected by its expulsion;

(b) Office vacated: The expulsion shall create a vacancy in any office or position held by the expelled trading member;

(c) Rights of Creditors unimpaired: The expulsion shall not affect the rights of the trading members who are creditors of the expelled trading member;

(d) Fulfillment of Contracts: The expelled trading member shall be bound to fulfill transactions outstanding at the time of his expulsion and it may with the permission of the relevant authority close such outstanding transactions with or through a trading member;

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(e) Trading members not to deal: No trading member shall transact business for or with or share brokerage with the expelled trading member except with the previous permission of the relevant authority.

(f) Consequences of declaration of defaulter to follow: The provisions of Chapter XII and Chapter XII of the Bye Laws pertaining to default and Protection Fund respectively shall become applicable to the trading member expelled from the Exchange as if such trading member has been declared a defaulter.

Declaration of Defaulter: A trading member may be declared a defaulter by direction

Circular / notification of the relevant authority of the trading segment if:

1. He is unable to fulfill his obligations; or

2. He admits or discloses his inability to fulfill or discharge his duties, obligations and liabilities; or

3. he fails or is unable to pay within the specified time the damages and the money difference due on a closing-out effected against him under these Bye Laws, Rules and Regulations; or

4. he fails to pay any sum due to the Exchange or to submit or deliver to the Exchange on the due date, delivery and receive orders, statement of differences and securities, balance sheet and such other clearing forms and other statements as the relevant authority may from time to time prescribe; or

5. if he fails to pay or deliver to the Defaulters' Committee all monies, securities and other assets due to a trading member who has been declared a defaulter within such time of the declaration of default of such trading member as the relevant authority may direct; or

6. if he fails to abide by the arbitration proceedings as laid down under the Bye Laws, Rules and Regulations Without prejudice to the foregoing, if a Trading Member is either expelled or declared a defaulter by any other recognized Stock Exchange on which he is a member or if the registration certificate is cancelled by SEBI, then the said Trading Member is expelled from the Exchange.

Failure to fulfill Obligations

The relevant authority may order a trading member to be declared a defaulter if he fails to meet an obligation to a trading member or constituent arising out of Exchange transactions.

Insolvent a Defaulter

A trading member who has been adjudicated an insolvent shall be ipso factor declared a defaulter although he may not be at the same time a defaulter on the Exchange.

Trading member's Duty to Inform

A trading member shall be bound to notify the Exchange immediately if there be a failure by any trading member to discharge his liabilities in full.

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Compromise Forbidden

A trading member guilty of accepting from any trading member anything less than a full and bona fide money payment in settlement of a debt arising out of a transaction in securities shall be suspended for such period as the relevant authority may determine.

Surrender of Trading Membership. TMs can apply for surrender of their trading membership once admitted on the Exchange. Surrender of trading membership can be permitted by the Exchange after fulfilling certain conditions by the member such as, clearing off all the dues to the Exchange and NSCCL, notifying all other TMs of the approval of surrender, obtaining No dues certificate from SEBI, issuance of a public notification in leading dailies etc. The deposits of the trading members would be released by the Exchange/NSCCL after a prescribed lock-in period. However, there is no lock-in period applicable in case of trading member, who is,

1. Not SEBI registered

2. SEBI registered but not enabled

3. SEBI registered and enabled but not traded at all

Authorized Persons

Trading members of the Exchange may appoint authorized persons who are individuals, registered partnership firms, bodies corporate or companies as defined under the Companies Act, 1956 in the Capital Market (CM) segment or Futures & Options (F&O) segment or in both CM and F&O segments.

An authorized person may introduce clients to the trading member for whom they may receive remuneration / commission / compensation from the trading member and not from the clients.

The clients introduced by the authorized person will have a direct relationship with the trading member i.e. the member-constituent agreement, know your client forms, risk disclosure document, etc. shall be executed between the client and the trading member i.e., the authorized person shall not be allowed to have any trading relationship with the clients.

The trading member shall issue the contract notes and/or bills directly to the client i.e. the authorized person shall not issue contract notes, confirmation memo and/or bills in their name. The clients introduced by the authorized person would be required to deliver securities and make payments directly in the trade name of the trading member (as appearing on the SEBI registration certificate). Similarly the trading member shall deliver securities and make payments directly in the name of the clients.

For further details pertaining to authorized person and trading members desirous of appointing authorized person may refer to circular no. 333 (NSE/MEM/4082) dated April 10, 2003.

Sub-Brokers

A Sub-broker is a person who intermediates between investors and stock brokers. He acts on behalf of a stock-broker as an agent or otherwise for assisting the investors for buying, selling or dealing in securities through such stock-broker. No sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A sub-broker may take the form of a sole proprietorship, a partnership firm or a company. Stockbrokers of the

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recognized stock exchanges are permitted to transact with sub-brokers. Sub-brokers are required to obtain certificate of registration from SEBI in accordance with SEBI (Stock Brokers & Sub-brokers) Rules and Regulations, 1992, without which they are not permitted to buy, sell or deal in securities. SEBI may grant a certificate to a sub-broker, subject to the conditions that:

(a) He shall pay the fees in the prescribed manner;

(b) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints received;

(c) In case of any change in the status and constitution, the sub- broker shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock

Exchange; and

(d) He is authorized in writing by a stock-broker being a member of a stock exchange for affiliating himself in buying, selling or dealing in securities.

In case of company, partnership firm and sole proprietorship firm, the directors, the partners and the individual, shall comply with the following requirements:

(a) The applicant is not less than 21 years of age;

(b) The applicant has not been convicted of any offence involving fraud or dishonesty;

(c) The applicant has at least passed 12th standard equivalent examination from an institution recognized by the Government.

(d) They should not have been debarred by SEBI.

(e) The corporate entities applying for sub-broker ship shall have a minimum paid up capital of Rs. 5 lakh and it shall identify a dominant shareholder who holds a minimum of 51% shares either singly or with the unconditional support of his/her spouse.

The salient features of the circular Ref. No. SMD/POLICY/CIRCULAR/11-97 dated May 21, 1999 issued by SEBI is as under:

1. The registered sub-broker can transact only through the member broker who had recommended his application for registration. If the Sub-broker is desirous of doing business with more than one broker, he will have to obtain separate registration in each case.

2. The sub-broker shall disclose the names of all other sub-brokers/brokers where he is having direct or indirect interest.

3. It shall be the responsibility of the broker to report the default if any of his sub broker to all other brokers with whom sub-broker is affiliated.

4. The agreement can be terminated by giving the notice in writing of not less than 6 months by either party.

5. Sub-brokers are obligated to enter into agreements and maintain the database of their clients/investors in the specified format. The applicant sub-broker shall submit the required documents to the stock exchange with the recommendation of a TM. After verifying the

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documents, the stock exchange may forward the documents of the applicant sub-broker to SEBI for registration. A sub-broker can trade in that capacity after getting himself registered with SEBI. The Exchange may not forward the said application of the sub-broker to SEBI for registration if the applicant is found to have introduced or otherwise dealt with fake, forged, stolen, counterfeit etc. shares and securities in the market.

The sub-broker of a TM of the Exchange has to comply with all the requirements under SEBI (stock brokers and sub-brokers) Regulation, 1992 and the requirements of the Exchange as may be laid down from time to time. The sub broker is bound by and amenable to the Rules, Byelaws and Regulations of the Exchange. The sub-broker shall also comply with all terms and conditions of the agreement entered into by him with the TM. After registration with SEBI, the sub-broker can buy, sell or deal in securities on behalf of the investors through the broker with whom he is affiliated. The TM has to issue contract notes for all trades in respect of its sub-broker in the name of the sub-broker and the sub-broker shall, in turn issue purchase/sale notes to his clients as per the format prescribed by the Exchange. The TM with whom the sub-broker is affiliated is responsible for –

1) Ensuring the compliance by a sub-broker of the Rules, Bye-laws and Regulations of the Exchange

2) Inspecting that the sub-brokers are registered and recognized

3) Ensuring that the sub-brokers function in accordance with the Scheme, Rules, Byelaws, Regulations etc. of the Exchange/NSCCL and the SEBI Regulations etc.

4) Informing the sub-broker and keeping him apprised about trading/settlement cycles, delivery/payment schedules and any changes therein from time to time.

5) Reporting any default or delay in carrying out obligations by any of the sub brokers affiliated to him, to all other stock brokers with whom the said sub broker is affiliated.

DepositoriesA depository is an entity where the securities of an investor are held in electronic form. The person who holds a demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account. Depositories help in the settlement of the dematerialized securities. Each custodian/clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL. As per the schedule of allocation of securities determined by the NSCCL, the depositories transfer the securities on the pay-out day from the account of the NSCCL to those of members/custodians.

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Unit –VII

Network of stock exchange in India

National stock exchange

Bombay stock exchange

Regional stock exchange

Over the counter exchange of India

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National Stock Exchange.The National Stock Exchange of India Limited (NSE) has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

The Group

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AT A GLANCE:

CAPITAL MARKET (EQUITIES) SEGMENT

Number of VSATs May 31, 2006  2,810

Number of cities covered May 31, 2006  339

Settlement Guarantee Fund March 31, 2005  Rs. 1,550.90 crores

Investor Protection Fund (CM and F&O) May 31, 2006  Rs. 144.20 crores

Number of securities available for trading May 31, 2006  1,379

Record number of trades January 05, 2006  28,49,987

Record daily turnover (quantity) January 05, 2006  6,757 lakhs

Record daily turnover (value) February 28, 2001  Rs.10,366.52 crores

Record market capitalization June 24, 2006  Rs. 17,23,648.70 crores

Record value of S&P CNX Nifty Index June 24, 2006  2,204.45

Record value of CNX Nifty Junior Index February 23, 2000  5,365.90

Record Pay-in/Pay-out (Rolling Settlement):

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Funds Pay-in/Pay-out February 05, 2005*  Rs. 685.76 crores

Securities Pay-in/Pay-out (Value) January 13, 2005*  Rs. 1884.09 crores

Securities Pay-in/Pay-out (Quantity) August 21, 2003*  1470.14 lakhs

*Settlement Date

DERIVATIVES (F&O) SEGMENT

No. of cities covered June 09, 2006  312

Settlement Guarantee Fund March 31, 2005  Rs. 4,356.85 crores

Record daily turnover (value) January 28, 2005  Rs. 21,921.34 crores

Record number of trades April 28, 2006  4,02,980

WHOLESALE DEBT SEGMENT

Number of securities available for trading May 31, 2006  3,103

Record daily turnover (value) August 25, 2003  Rs.13,911.57 crores

Over The Counter Exchange of India (OTCEI) was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.

Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading.

OTCEI OVER THE COUNTER EXCHANGE OF INDIA.

Over The Counter Exchange of India (OTCEI) was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.

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Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advantage, Sonora Tiles & Brilliant mineral water, etc.

OTCEI...

is the first screen based nationwide stock exchange in India is the first exchange to introduce Market Making in India is the first exchange to introduce Sponsorship of companies in India is the only exchange to allow listing of companies with paid-up below Rs.3 crores is the only exchange to allow companies with less than 3 year track record to tap capital

market. has shifted trading from counter receipts to share certificates has introduced Weekly Settlement Cycle allows short selling allows demat trading through NSDL has tied-up with NSCCL for Clearing

Base Minimum Capital deposited with the Exchange

The Base Minimum Capital is taken as security for due performance and fulfillment by the member of his operations and obligations towards the Exchange. The minimum base capital is Rs. 4 lakhs. All members have to comply with the Base Minimum Capital requirements before their activation. The members may opt for Base Minimum Capital by way of Cash, FDRs, Bank Guarantee or Securities.

Cash to be deposited with the Exchange- minimum 25 % i.e. Rs. 1 lakh Deposit of Fixed Deposit Receipts (FDRs)- (25 %) issued by approved banks Deposit /lodgment of Securities- (maximum 50 %) with approved custodian (HDFC

Bank Ltd.) with 20% margin. Irrevocable Bank guarantees (in lieu of securities - maximum 50 %) from approved

banksMembers can also deposit additional base capital with the Exchange. The cash component of the additional base capital to be deposited should be a minimum 30%.

Intra-day Limits: Turnover Limit: Members are subject to intra-day trading limits. Gross Turnover (buy+sell) for the day shall not exceed twenty five times (25) the base capital deposited by the members. Members desirous of increasing their limits will have to submit additional deposits by way of cash, bank guarantees, fixed deposit receipts and securities. Trading Members violating the intra-day gross turnover limit at any time on any trading day shall not be permitted to trade forthwith.

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Gross Exposure Limit: Members are subject to gross exposure limits. Gross exposure, being the aggregate of the cumulative net outstanding positions (purchase or sales) in each security shall not exceed eight and half times (8.5) the base capital deposited by the members. Gross Exposure at any point of time shall also include net outstanding positions of the previous settlement till the securities pay-in for the previous settlement. Members desirous of increasing their limits will have to submit additional deposits by way of cash, bank guarantees, fixed deposit receipts and securities.

Margins:

All margins imposed by the Exchange are payable on T+1 day.

The Exchange collects the following margins from brokers depending on their positions/ exposures and market volatility, in line with SEBI requirements:

A) Daily Margin

Daily margin payable by the member consists of value at Risk Margin and Mark to Mark Margin.

B) Mark to Market Margin

Mark to market margin is computed on the basis of mark to market loss of a member. Mark to market loss is potential loss, in case the cumulative net outstanding position of the member in all securities at the end of day is closed out. Mark to Market margin is calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. MTM Profit/loss across different securities within the same settlement is set off to determine the MTM loss for a settlement. Such MTM losses for settlements are computed at client level.

C) Value at Risk Margin

Value at Risk Margin is computed for all securities in the rolling settlement. All securities are classified into three groups for purpose of vary margin.

Bombay Stock Exchange.

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualized and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

With demutualization, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is

72

professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries.

In terms of organization structure, the Board formulates larger policy issues and exercises over-all control. The committees constituted by the Board are broad-based. The day-to-day operations of the Exchange are managed by the Managing Director and a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.

For the premier Stock Exchange that pioneered the stock broking activity in India, 125 years of experience seem to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "Bombay Stock Exchange Limited" by paying a princely amount of Re1.

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Following are the main BSE Indexes

BSE PSU Index

BSE TECK Index

BSE mid Cap & Small Cap Index

BSE BANKX

BSE 100 Index

BSE 200 Index

BSE 500 Index

How do S&P CNX Nifty and the `BSE sensitive index’ compare?

Every technical reason favors the S&P CNX Nifty.

S&P CNX Nifty is a more diversified index, accurately reflecting overall market conditions. The BSE index is more vulnerable to movements of individual stocks. The reward-to-risk ratio of S&P CNX Nifty is higher (5.74 as compared with 5.12), making it a more attractive portfolio – both indices offer similar returns, but S&P CNX Nifty costs less risk.

S&P CNX Nifty is a more liquid index. Trades on the S&P CNX Nifty suffer lower market impact cost.

Several important issues lead back to the fact that the S&P CNX Nifty is calculated using NSE prices while the `BSE sensitive index’ is calculated using BSE prices.

S&P CNX Nifty is calculated from a more liquid market, which features the safety of novation at the clearing corporation. Users of the BSE index would be forced to trade on BSE, a less liquid exchange where there is settlement risk owing to the lack of novation and the lack of a clearing corporation.

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Unit –VIII

Trend of capital market in India

Trend of Sensex and Nifty (for last 2 years)

Factors responsible for the fluctuation of Sensex

and Nifty.

Research and Findings

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Introduction

Traditionally, indexes have been used as information sources. By looking at an index we know how the market is faring. This information aspect also figures in myriad applications of stock market indexes in economic research. This is particularly valuable when an index reflects highly up-to-date information (a central issue which is discussed in detail ahead) and the portfolio of an investor contains illiquid securities - in this case, the index is a lead indicator of how the overall portfolio will fare.

In recent years, indexes have come to the fore owing to direct applications in finance, in the form of index funds and index derivatives. Index funds are funds which passively `invest in the index'. Index derivatives allow people to cheaply alter their risk exposure to an index (this is called hedging) and to implement forecasts about index movements (this is called speculation). Hedging using index derivatives has become a central part of risk management in the modern economy. These applications are now a multi-trillion dollar industry worldwide, and they are critically linked up to market indexes.

Finally, indexes serve as a benchmark for measuring the performance of fund managers. An all-equity fund should obtain returns like the overall stock market index. A 50:50 debt: equity fund should obtain returns close to those obtained by an investment of 50% in the index and 50% in fixed income. A well-specified relationship between an investor and a fund manager should explicitly define the benchmark against which the fund manager will be compared, and in what fashion.

The most important type of market index is the broad-market index. In most countries, a single major index dominates benchmarking, index funds, index derivatives and research applications. In addition, more specialized indexes often find interesting applications. In India, we have seen situations where a dedicated industry fund uses an industry index as a benchmark. In India, where clear categories of ownership groups exist, it becomes interesting to examine the performance of classes of companies sorted by ownership group.

SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS

For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1.

Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.

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SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.

Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years become one of the most prominent brands in the country.

The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The SENSEX captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception.

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Understanding Free-float Methodology

Concept:

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE Tec in July 2001 and BANKEX in June 2003. While BSE Tec Index is a TMT benchmark, BANKEX is positioned as a benchmark for the banking sector stocks. SENSEX becomes the third index in India to be based on the globally accepted Free-float Methodology.

Major advantages of Free-float Methodology:

A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.

Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. For example, the concentration of top five companies in SENSEX has fallen under the free-float scenario thereby making the SENSEX more diversified and broad-based.

A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-à-vis an investable index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely held companies in the index while at the same time preventing their undue influence on the index movement.

Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-

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float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float:

Share holdings held by investors that would not, in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. In specific, the following categories of holding are generally excluded from the definition of Free-float:

Holdings by founders/directors/ acquirers which has control element Holdings by persons/ bodies with "Controlling Interest"

Government holding as promoter/acquirer

Holdings through the FDI Route

Strategic stakes by private corporate bodies/ individuals

Equity held by associate/group companies (cross-holdings)

Equity held by Employee Welfare Trusts

Locked-in shares and shares which would not be sold in the open market in normal course.

The remaining shareholders would fall under the Free-float category.

Determining Free-float factors of companies:

BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis with the Exchange. The Exchange determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.

Free-float Bands:

% Free-Float Free-Float Factor % Free-Float Free-Float Factor

>0 – 5% 0.05 >50 – 55% 0.55

>5 – 10% 0.10 >55 – 60% 0.60

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>10 – 15% 0.15 >60 – 65% 0.65

>15 – 20% 0.20 >65 – 70% 0.70

>20 – 25% 0.25 >70 – 75% 0.75

>25 – 30% 0.30 >75 – 80% 0.80

>30 – 35% 0.35 >80 – 85% 0.85

>35 – 40% 0.40 >85 – 90% 0.90

>40 – 45% 0.45 >90 – 95% 0.95

>45 – 50% 0.50 >95 – 100% 1.00

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values.

The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. The Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The Index Committee of the Exchange comprises of experts on capital markets from all major market segments. They include Academicians, Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent Governing Board members, and Exchange administration.

Adjustment for Bonus, Rights and Newly issued Capital:

The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value.

The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 14 Indices.

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Adjustments for Rights Issues:

When a company, included in the compilation of the index, issues right shares, the free-float market capitalization of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalization (see 'Base Market Capitalization Adjustment' below).

Adjustments for Bonus Issue:

When a company, included in the compilation of the index, issues bonus shares, the market capitalization of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalization, only the 'number of shares' in the formula is updated.

Other Issues:

Base Market Capitalization Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

Base Market Capitalization Adjustment:

The formula for adjusting the Base Market Capitalization is as follows:

New Market Capitalization

New Base Market Capitalization = Old Base Market

Capitalization x ---------------------------------------

Old Market Capitalization

To illustrate, suppose a company issues right shares which increases the market capitalization of the shares of that company by say, Rs.100 crores. The existing Base Market Capitalization (Old Base Market Capitalization), say, is Rs.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New Base Market Capitalization” will then be:

2450 x (4781+100)

-------------------------- = Rs.2501.24 crores

         4781

This figure of 2501.24 will be used as the Base Market Capitalization for calculating the index number from then onwards till the next base change becomes necessary.

SENSEX - Scrip selection criteria:

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The general guidelines for selection of constituents in SENSEX are as follows:

1. Listed History: The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.

2. Trading Frequency: The scrip should have been traded on each and every trading day in the last three months. Exceptions can be made for extreme reasons like scrip suspension etc.

3. Final Rank: The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

4. Market Capitalization Weightage: The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.

5. Industry Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

6. Track Record: In the opinion of the Committee, the company should have an acceptable track record.

Top Gainers - All Market

Listed below are the current top Gainers with respect to Price change in % terms.

Scrip Code

Scrip NameScrip

GroupOpen Rate

High Rate

Low Rate

Last Traded

Change w.r.t. Last

Close(abs)

Change w.r.t. Last Close %

505533 DHANPRAYOG B2 34.55 34.55 34.55 34.55 5.75 19.97

530193INTERN DIAMO

B2 3.57 5.25 3.57 5.25 0.85 19.32

530235 KJMC FINA SE B2 13.50 15.85 13.50 15.80 2.55 19.25

530765 DEVKI LEASIN B2 4.00 4.40 4.00 4.38 0.68 18.38

511401MUNOTH INVES

B2 3.00 3.00 3.00 3.00 0.42 16.28

531672 INANI SECURI B2 15.00 15.00 15.00 15.00 2.00 15.38

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531823 ARVIN REMEDI B1 1.59 1.87 1.58 1.79 0.23 14.74

532711 SUNIL HITECH B1 84.55 101.40 84.50 98.35 12.30 14.29

532723MONET SUGAR

B2 46.70 54.80 46.20 52.90 6.20 13.28

531175 BRELS INFOTE B2 0.50 0.56 0.48 0.53 0.06 12.77

Top Gainers - All Market

Listed below are the current top Gainers with respect to Price change in % terms.

Scrip Code

Scrip NameScrip

GroupOpen Rate

High Rate

Low Rate

Last Traded

Change w.r.t. Last Close(abs)

Change w.r.t. Last

Close %

531102 SURANA CORPR B2 23.50 27.50 23.50 26.00 2.70 11.59

505744 FED MOG GOE B1 245.70 283.85 244.50 272.50 27.50 11.22

530095BHAGWAND MET

B2 6.78 7.20 6.10 6.80 0.68 11.11

524748 LINK PHARMA B2 7.56 8.58 7.56 8.58 0.78 10.00

526773 PRESSURE SEW B2 5.72 5.72 5.72 5.72 0.52 10.00

531644 TOKYO FINANC B2 3.20 3.52 3.00 3.52 0.32 10.00

590053 KAR MOBILES S 192.00 198.10 190.00 198.10 18.00 9.99

532762 ACTION CONST B1 200.00 221.80 195.05 221.80 20.15 9.99

512022WINRO COMMR.

B2 107.40 107.40 107.40 107.40 9.75 9.98

500343PUDUMJE PUL&

B1 85.00 96.00 85.00 96.00 8.70 9.97

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Top Losers - All Market

Listed below are the current Losers with respect to Price change in % terms.

Scrip Code Scrip Name

Scrip Group

Open Rate

High Rate

Low Rate

Last Traded

Change w.r.t. Last Close(abs)

Change w.r.t. Last

Close %

530419SUMEDH FISCA

B2 10.39 10.39 7.35 7.35 -1.52 -17.14

500143 P.H.CAPITAL B2 4.99 5.00 4.12 4.14 -0.75 -15.34

511642WISEC GLOBAL

B2 13.50 13.94 11.52 11.52 -1.88 -14.03

523564 MORGAN IND B2 7.60 7.60 5.66 5.66 -0.86 -13.19

511451DHARANI FINA

B2 3.53 3.70 3.53 3.70 -0.53 -12.53

531127ENRICH INDUT

B2 1.80 1.80 1.70 1.70 -0.24 -12.37

532503 RAJAPAL MILL S 455.10 455.50 408.15 410.00 -57.75 -12.35

512437 APOLLO FINVE B2 10.35 10.35 9.10 9.10 -1.16 -11.31

502352AURANG PAP M

B2 5.74 5.90 5.23 5.23 -0.65 -11.05

512237 JAI CORP LIM B1 2,434.45 2,434.45 2,200.55 2,200.55 -244.45 -10.00

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Top Losers - All Market

Listed below are the current Losers with respect to Price change in % terms.

Scrip Code

Scrip NameScrip

GroupOpen Rate

High Rate

Low Rate

Last Traded

Change w.r.t. Last Close(abs)

Change w.r.t. Last

Close %

507852 ADDI INDUSTR S 0.00 7.96 7.96 7.96 -0.88 -9.95

513436 SHAH ALLOY L B1 99.95 104.00 88.70 88.70 -9.80 -9.95

531289 INTERF TEC P B2 3.17 3.17 3.17 3.17 -0.35 -9.94

508905 SMIFS CAP MA B2 39.65 39.65 35.80 35.80 -3.95 -9.94

531236MEWAR POLYTE

S 15.90 15.90 15.90 15.90 -1.75 -9.92

511742 CHOKHANI SEC B2 9.01 9.01 9.01 9.01 -0.99 -9.90

511728 KZLEASING B2 5.25 5.25 4.76 4.76 -0.52 -9.85

526251MIDEAS POR M

B2 3.47 3.47 2.85 2.85 -0.31 -9.81

523846 SKYPAK SER S B2 10.12 10.12 8.30 8.30 -0.90 -9.78

530519 INTERF FIN S B2 2.70 2.70 2.31 2.34 -0.25 -9.65

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Unit –IXRole of RBI &SEBI

SEBI guidelines & impact

Role of SEBI

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Role of RBI and SEBI

Role of RBI.

Modern day central banking extends far beyond the domain of traditional functions such as currency management, banker to Government and promoting financial soundness. These re-orientations have been the natural corollary of pursuing monetary policy measures that are focused on definitive, well-defined and quantifiable objectives.

Central banks in emerging economies differ from their counterparts of developed countries in several ways. In some developed countries, central banks are vested only with the conduct of monetary policy. In most emerging countries, central banks, besides monetary policy, also shoulder the responsibilities of debt management, and regulation/supervision of banks and financial institutions. Even in regard to the conduct of monetary policy, central banks in emerging economies have to contend with several objectives, and distinct trade-offs as compared with some developed countries which pursue a single objective of price stability. While pursuing multiple objectives, and managing complex trade-offs, central banks in emerging countries assume the responsibility of looking after the interests of several agents including depositors, intermediaries, government, business, and external trade. In regard to choice of instruments, given the level of market development, and multiple objectives, emerging countries cannot entirely rely on single instrument such as interest rates. Rather, central banks in emerging countries prefer a judicious mix of interest rates, cash reserves, and other instruments. The most striking feature of central banking in emerging countries pertains to their critical role in development of financial markets and active involvement in the institution building process.

Institution Building

In the Indian context, the Reserve Bank of India (RBI), in consultation with the Government, has played a major role in institution building since independence. Efforts in this direction encompass RBI’s contribution to development of commercial banking, development finance institutions in the areas of agriculture and industry, and specialized institutions for development of financial markets. After initiation of the economic reforms of the early 1990s, the role of RBI in the area of developing financial markets particularly the government securities, money markets and payment and settlement systems has come to the fore. Moreover, in a global environment, with increasing integration of the international economy, the RBI’s role as the regulator and supervisor of commercial banks and financial institutions has assumed a central place in promoting transparency and credibility of institutions and monetary and financial policies.

Monetary Policy

Most central bankers presently enjoy independence in choosing their policy instrument and have used it to rely on setting short-term interest rates. As a logical offshoot, many central banks in emerging markets are giving more exposures to pursuing price stability as one of the main objectives of monetary policy. In the RBI, there is a Financial Markets Committee (FMC), which meets daily before the opening of the markets and at times more frequently, when the situation warrants. The FMC reviews the liquidity and interest rate situation in financial markets and advises top management on the course of action that would be required by RBI during the day.

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This institutionalized framework helps the RBI to take an integrated view on all-important decisions having an impact on financial markets.

Economists have long debated as to what should be the objective(s) of monetary policy. In most developed countries, monetary stability, defined as the price stability, constitutes the dominant objective of monetary policy. In emerging economies, central banks have to contend with several concerns: price stability, sustained growth, financial system’s stability, stable exchange rate, and operating objectives of liquidity management. The animated discussion on central bank objectives ranges broadly between single objective and multiple objectives. Such discussion entails a generic analysis of advantages and disadvantages of single or multiple objectives, and the nature, and scope of central banking organization, which differs across the country groups of developed and emerging countries due to significant difference in socio-economic-technological-institutional environment.

Adoption of a single objective of monetary policy by central banks is based on the arguments that (i) monetary policy should concentrate its instruments on one objective, free from any policy trade-off, thereby strengthening the implementation of monetary policy; (ii) a single objective promotes transparency, accountability and independence of monetary policy; (iii) a single objective is more realistic in a deregulated and globalized economic and financial system; and (iv) it is easier to observe the channels of transmission, and therefore, easier to determine the ‘right’ instruments. Since a central bank’s monetary policy actions could involve several implications for the economy as a whole, the counterarguments against a single objective derive from the fact that (i) economic objectives should be achieved simultaneously (in harmony), and a single objective may disrupt that harmony; (ii) monetary policy by itself may not be able to bring down inflation further and other wings of policy have to be deployed.

The case for multiple objectives for central banks entails “co-ordination” of a range of policies and thus, a spectrum of objectives. The principal reason as to why central banks in emerging economies have to contend with multiple objectives or at least dual objectives of price stability and economic growth derives from the concerns of socio-economic-political systems. James Tobin, a Nobel laureate economist, argued that since central banks form an integral part of government, they cannot dissociate from the major objectives of the society, which includes sustained economic growth and price stability. William Poole, a revered central banker viewed that economic growth is a citizens’ objective and central bankers too are citizens.

Role of SEBI

The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto.

The following departments of SEBI take care of the activities in the secondary market.

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Sr.No. Name of the Department Major Activities

1. Market Intermediaries

Registration and Supervision

department (MIRSD)

Registration, supervision, compliance monitoring

and inspections of all market intermediaries in

respect of all segments of the markets viz. equity,

equity derivatives, debt and debt related derivatives.

2. Market Regulation

Department (MRD)

Formulating new policies and supervising the

functioning and operations (except relating to

derivatives) of securities exchanges, their

subsidiaries, and market institutions such as

Clearing and settlement organizations and

Depositories (Collectively referred to as ‘Market

SROs’.)

3. Derivatives and New Products

Departments (DNPD)

Supervising trading at derivatives segments of stock

exchanges, introducing new products to be traded,

and consequent policy changes

The issue of debt securities having maturity period of more than 365 days by listed companies (i.e. which have any of their securities, either equity or debt, offered through an offer document, and listed on a recognized stock exchange and also includes Public Sector Undertakings whose securities are listed on a recognized stock exchange) on private placement basis must comply with the conditions prescribed by SEBI from time to time for getting them listed on the stock exchanges. Further, unlisted companies/statutory corporations/other entities, if they so desire, may get their privately placed debt securities listed on the stock exchanges, by complying with the relevant conditions. Briefly, these conditions are:

Compliance with disclosure requirements under Chapter VI of the SEBI (Disclosure and Investor Protection) Guidelines, 2000, Listing Agreement with the exchanges and provisions of the Companies Act.

Such disclosures may be made through the web site of the stock exchanges where the debt securities are sought to be listed if the privately placed debt securities are issued in the standard denomination of Rs. 10 lakhs.

The company shall sign a separate listing agreement with the exchange in respect of debt securities.

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The debt securities shall carry a credit rating from a Credit Rating Agency registered with SEBI.

The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the debt securities.

The debt securities shall be issued and traded in demat form.

All trades with the exception of spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange.

If any advertisement carries any financial data, it shall also contain data for the past three years and shall include particulars relating to sales, gross profit, net profit, share capital, reserves, and earnings per share, dividends and the book values.

(a) All issue advertisements in newspapers, Magazines, brochures, pamphlets containing highlights relating to any issue shall also contain risk factors given equal importance in all respects including the print size.

(b) The print size of highlights and risk factors in issue advertisements shall not be less than point 162(7) size.

(c) 163(Subject to section 66 of the Companies Act, 1956, any advertisement made by an issuer namely Pre – Issue advertisement, advertisement for opening or closure of the issue, shall be in format and contain the minimum disclosures as given in the relevant part of Schedule XX – A.

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Unit –X

Study of stock indexes

Market capitalization of different indexes Performance of Stock indexes( for past 2

years) Analyze and Findings

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Indices Highlights

INDICES

52 Week Market Capitalization Turnover

Close High Low (Rs. crores) % to TotalMkt Cap (Rs. crores) % to Total

TurnoverSENSEX 13,113.81 14,723.88 8,799.01 835,069.03 23.24 683.42 20.55

MIDCAP 5,512.40 6,229.40 3,692.15 225,763.46 6.28 574.31 17.27

SMLCAP 6,682.53 7,872.80 4,480.45 79,820.38 2.22 334.86 10.07

BSE-100 6,626.04 7,444.28 4,471.51 1,155,984.85 32.16 1,328.06 39.94

BSE-200 1,568.21 1,760.70 1,058.66 1,304,116.97 36.29 1,808.42 54.38

BSE-500 5,002.81 5,616.67 3,360.85 1,472,225.11 40.96 2,350.77 70.69

BSE Sectoral Indices

AUTO 4,680.55 5,881.83 3,959.66 88,074.81 2.45 66.47 2.00

BANKEX 6,470.32 7,653.84 3,934.12 171,442.19 4.77 75.62 2.27

CD 3,738.53 4,060.24 2,339.78 7,471.49 0.21 29.11 0.88

CG 9,271.18 10,148.94 5,674.21 108,299.60 3.01 102.14 3.07

FMCG 1,788.37 2,383.36 1,109.03 87,646.05 2.44 36.73 1.10

HC 3,659.18 4,154.08 2,804.37 69,470.28 1.93 98.28 2.96

IT 4,879.59 5,611.33 3,017.25 186,458.69 5.19 223.51 6.72

METAL 9,122.01 11,402.40 6,425.56 66,371.10 1.85 286.18 8.61

OIL&GAS 6,472.99 6,803.00 4,243.21 167,592.18 4.66 97.52 2.93

PSU 6,023.39 6,609.76 4,323.37 734,902.59 5.19 191.81 5.77

TECk 3,525.65 3,972.35 2,033.16 294,109.30 8.18 342.80 10.31

BSE Dollex Indices

DOLLEX-30 2,510.82 2,740.80 1,570.26 -- -- -- --

DOLLEX-100 1,598.56 1,746.08 1,005.49 -- -- -- --

DOLLEX-200 608.88 664.63 383.12 -- -- -- --

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BANK NIFTY - Industry wise Market CapitalizationAs on 29-Dec-2006 (Rs. crores)

Security Market Capitalization Weightage (%)

BANK OF BARODA 8742 3.37

BANK OF INDIA 10109 3.9

CANARA BANK 11324 4.37

CORPORATION BANK 4977 1.92

HDFC BANK LTD 33656 12.99

ICICI BANK LTD. 79702 30.77

ORIENTAL BANK OF COMMERCE 5712 2.21

PUNJAB NATIONAL BANK 15986 6.17

STATE BANK OF INDIA 65556 25.31

SYNDICATE BANK 3902 1.51

UNION BANK OF INDIA 6198 2.39

UTI BANK LTD 13192 5.09

Total 259056 100

CNX IT - Industry wise Market CapitalizationAs on 29-Dec-2006 (Rs. crores)

Security Market Capitalization Weightage (%)

CMC LTD 1027 0.23

FINANCIAL TECHNO (I) LTD 7818 1.78

GTL LTD 1398 0.32

HCL INFOSYSTEMS LTD 2702 0.62

HCL TECHNOLOGIES LTD 20821 4.74

HEXAWARE TECHNOLOGIES LTD 2630 0.6

HINDUJA TMT LTD 3011 0.69

I-FLEX SOLUTIONS LIMITED 15869 3.61

IGATE GLOBAL SOLUTIONS LT 1084 0.25

INFOSYS TECHNOLOGIES LTD 124596 28.37

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MASTEK LTD 1048 0.24

MOSER-BAER (I) LTD 3447 0.78

MPHASIS LIMITED 4932 1.12

PATNI COMPUTER SYST LTD 5772 1.31

POLARIS SOFTWARE LAB LTD 1700 0.39

ROLTA INDIA LTD 2034 0.46

SATYAM COMPUTER SERVICES 31753 7.23

TATA ELXSI (I) LTD 817 0.19

TATA CONSULTANCY SERV LT 119586 27.23

WIPRO LTD 87141 19.84

Total 439187 100

Performance of Stock Indexes.

Index Open High Low Current Value Previous Close Change(Pts.) Change (%)

SENSEX 13,127.86 13,160.15 13,030.87 13,113.81 13,183.24 -69.43 -0.53

MIDCAP 5,507.03 5,544.45 5,488.59 5,512.40 5,517.06 -4.66 -0.08

SMLCAP 6,711.74 6,738.00 6,673.99 6,682.53 6,711.51 -28.98 -0.43

BSE-100 6,644.24 6,658.76 6,589.20 6,626.04 6,669.06 -43.02 -0.65

BSE-200 1,572.27 1,576.06 1,559.95 1,568.21 1,577.57 -9.36 -0.59

BSE-500 5,010.66 5,027.82 4,976.19 5,002.81 5,028.95 -26.14 -0.52

BSE Sectoral Indices

AUTO 4,691.34 4,713.33 4,655.93 4,680.55 4,700.34 -19.79 -0.42

BANKEX 6,511.16 6,525.59 6,430.35 6,470.32 6,552.92 -82.60 -1.26

CD 3,737.25 3,768.57 3,712.09 3,738.53 3,742.69 -4.16 -0.11

CG 9,312.12 9,312.17 9,216.92 9,271.18 9,342.38 -71.20 -0.76

FMCG 1,813.76 1,813.76 1,782.97 1,788.37 1,811.58 -23.21 -1.28

HC 3,663.03 3,695.64 3,648.77 3,659.18 3,677.38 -18.20 -0.49

IT 4,769.80 4,894.50 4,750.92 4,879.59 4,808.08 71.51 1.49

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METAL 9,306.74 9,417.96 9,093.61 9,122.01 9,330.87 -208.86 -2.24

OIL&GAS 6,498.23 6,511.03 6,444.51 6,472.99 6,540.71 -67.72 -1.04

PSU 6,088.42 6,088.42 6,007.26 6,023.39 6,103.26 -79.87 -1.31

TECk 3,484.49 3,536.46 3,462.27 3,525.65 3,503.64 22.01 0.63

BSE Dollex Indices

DOLLEX-30 2,517.04 2,520.28 2,498.44 2,510.82 2,527.65 -16.83 -0.67

DOLLEX-100 1,605.19 1,606.92 1,591.90 1,598.56 1,611.19 -12.63 -0.78

DOLLEX-200 611.32 612.13 606.52 608.88 613.38 -4.50 -0.73

Performance of various indices as of end March 2007 (in %)

1 month 3 month 6 month 1 year

S&P CNX Nifty 2.04 -3.65 6.5 12.31

S&P CNX 500 1.21 -4.54 5.26 8.07

S&P CNX Defty 3.71 -2.03 12.45 15.08

CNX Nifty junior 2.32 -3.21 5.65 7.27

CNX Midcap -0.56 -6.73 3.38 1.31

CNX IT Index 0.99 -4.63 14.1 19.01

S&P CNX Banks 1.56 -9.43 1.91 15.2

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Unit –XII

Recommendations &problem of capital market Problem of new issue market Problem of secondary market Suggestions and recommendations

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PROBLEMS OF PRIMARY AND SECONDARY MARKET

IT IS ten years since the Securities and Exchange Board of India (SEBI) started to put in place the regulatory framework for the capital market. And investors have certainly benefited from the availability of more information and a contemporary secondary market structure.

SEBI began to put in place regulations a decade ago, starting with its Guidelines for Disclosure and Investor Protection (primary markets) in 1992. A fairly broad-based regulatory framework is now in place, though, going forward, SEBI has to make the market a friendlier place for investors by plugging the gaps in its performance, especially in the following areas:

Enhancing disclosures

Despite a plethora of disclosure requirements, there are still key areas where investors get precious little information of value. This mainly relates to big-ticket corporate action, such as mergers, de-mergers, acquisitions, asset sell-offs, takeovers and inter-corporate investments. In each of these areas, no doubt, the minimum information required under the Companies Act is made available.

The disclosure level varies from one instance to another, though a lot of information is made available on the financials and the synergies of a merger. But the manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted.

The valuation of the two companies and the swap ratio are key aspects in any merger. No doubt, valuation reports are made available for inspection, but access is not easy for all investors. A

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comprehensive and mandated list of disclosures, like the one that accompanies an IPO or a rights offer, should be made available to all shareholders.

Aspects such as risks from these actions, mode of deployment of resources, the benefits, reasons for such action and management perception of the issues involved, can form part of such a disclosure list.

SEBI has much to do to make its existing disclosure requirements work better. This can be done only by making all disclosures available freely to everyone. Take, for instance, mutual funds. Trustee and asset management companies are required to file monthly/quarterly reports with SEBI. These must be available on the Internet.

Only public scrutiny and comment can improve the level of disclosures mandated by SEBI. While this is not a job that SEBI can do on its own, due partly to resource constraints and also because of the varying types of expertise needed, it has made a small beginning with its Web site http://www.edifar.nic.in/ and must make sure as much information as possible is pumped in through this Web site.

Quality of decisions

The effectiveness of any regulatory body is judged by the quality of implementation, in general, and the rate of convictions achieved in cases where there are violations.

What is worrying is the poor rate of conviction in major cases. Virtually every SEBI decision involving major cases — such as Sterlite, BPL, Videocon, Anand Rathi and Associates and Hindustan Lever — has been overturned by the appeals process (or the Securities Appellate Tribunal).

This hardly sends the right signals about SEBI's penal actions when regulations are violated. There is clearly something seriously amiss if the SAT can overturn SEBI orders by pointing to lacunae on almost every possible ground — ranging from the merely technical aspects to substantive issues involving the regulator's subjective judgment.

This is what happened in the Sterlite, BPL and Videocon cases (they were barred from capital market access for their role in price manipulation in 1998). . Quite clearly, the quality of SEBI's investigative work has to improve considerably so that penal actions stick.

Take a larger view

There are quite a few instances where shareholders have suffered due to specific corporate actions. Whenever an issue of this kind has come up, , SEBI has generally shied away from taking up the cudgels (unless nudged by some extraneous pressure) on behalf of the investors to ensure that they get a fair deal.

In some of the global development-triggered `changes in control', SEBI's actions have been mixed. In some cases, such as Castrol, it has acted with alacrity and ordered open offers. But in

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quite a few others, its stance has virtually enabled elaborate structures to be created that helped avoid open offers or its actions have come rather late in the day — Color Chem-Clariant, for example — imposing unfair costs on acquirers and shareholders.

There have been a quite a few decisions on whether open offers are triggered by global developments or not, both by SEBI and/or by SAT. But no parameters have been laid down so far and each issue is handled on a case-by-case basis.

When it comes to domestic acquisitions, SEBI's interpretation of `change in control' is questionable. When Gujarat Ambuja picked up the entire 14.4 per cent of the Tatas in ACC, it was clear that effective control had passed. But SEBI offered no view and, only when directed by the court, took the stance that there was `no change in control' on technical grounds. In such situations, SEBI has to come out and clearly say why it thinks there is change in control or not. The absence of a convincing rationale only creates precedents that can be used by others, as happened with Grasim-L & T.

Every time there is a major corporate action, SEBI should proactively examine if there are issues of a contentious nature. In most major cases SEBI has tended to take up matters only when there is a referral from a court or investor forum or the government (like in the UTI's assured return schemes).

Accounting, audit quality

SEBI can now act proactively on the issue of accounting and auditing quality. In several recent instances in the US, such as Enron, WorldCom, Global Crossing, Merck, to name a few, companies put out blatantly false numbers and auditors went along with this charade.

In India, hundreds of companies came out with IPOs and vanished subsequently, and in many companies, accounting and audit information has proved to be of poor quality and unreliable. This is where SEBI can step in and work with the government to have special audits done of the top 100 or 200 firms that account for more than 90 per cent of market capitalization and trading.

There is no reason to assume that everything is hunky-dory on the accounting-auditing front in Indian companies. Just look at the problems in the finance sector — the likes of IFCI, IDBI, UTI and Centurion Bank, to name a few — and one cannot help feeling there may be problems elsewhere too.

The plethora of inter-corporate investments, intra-company and intra-group transactions, guarantees and contingent liabilities are areas where there is room for considerable concern.

A one-time special audit, efforts to ensure that audit assignments are rotated at three- or five-year intervals and fast-tracking the process of accounting standards with relevant authorities are actions that SEBI can pursue before a crisis breaks out on this front.

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Perhaps the most significant change in the market in the last decade is the complete transformation of the trading, clearing and settlement infrastructure. From a market burdened with heavy problems of paper and an opaque trading structure (where brokers and sub-brokers ruled the roost), there has been a dramatic transformation to a paperless market and transparent trading system.

The last six months or so, all trades on the National Stock Exchange are settled in demat (paperless mode). Full marks to SEBI.

No doubt, the process of electronic trading was set off by the NSE, but SEBI too moved rapidly to force other exchanges, especially the Bombay Stock Exchange, to adopt contemporary trading systems.

By also moving towards rolling settlement (albeit after a considerable and unnecessary delay), cutting the settlement cycle and now going forward towards a T+1 settlement system, SEBI has made the markets much safer for investors. But when it comes to addressing price manipulation, the story is different.

Price manipulation — No dent: One area where SEBI has barely made any difference is in the manipulation of stock prices ahead of key corporate actions and even at other times when operator driven activity is rampant. The most recent instance was the manner in which all Ketan Parekh favoured stocks, such as Himachal Futuristic, Global Tele-Systems, SSI, Silver line, surged, recording heavy trading volumes.

But one was left completely in the dark on what was behind the sudden spurt in interest in these stocks and the rise in prices (even if not of the 1999-2000 kind). This was the kind of situation where SEBI should have stepped in proactively and told investors what was going in. This would do much more for investors than the mundane investor education programmes talked about often.

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Price manipulation, informed trading and insider trading with key operators/investors is now routine. This is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI has taken action on such price manipulation in just two cases (Bayer ABS and Amara Raja Batteries). Here, too, the penal action has hardly been stringent.

Act on corporate actions: Perhaps as a matter of routine, SEBI should take up all cases of corporate action and subject them to scrutiny for share price behavior ahead of and after the action.

Trading action is generally confined to a small list of 150 stocks, on which SEBI can focus its attention. It can also draw up a list of another 150 stocks of companies with reasonable standing but poor liquidity, for tracking. At the end of the day, SEBI's effectiveness will be enhanced only if it can make a dent in this crucial area. Else, the larger body of shareholders will be shortchanged by such price manipulation.

Suggestions and Recommendations

India does not have a legacy of employer provided pensions. The OASIS report is right in making the proposed pension system completely portable and independent of employers. India does not also have a legacy of social security, and does not have to contend with the nightmare of politically determined defined-benefit plans. The OASIS report is right in keeping its proposals for pension funds totally on a defined-contribution basis and providing market determined rates of return. The OASIS report is also right in eschewing any attempt to use the pension fund assets as a pool of funds for financing infrastructure or any other socially useful purpose other than on the basis of a competitive risk-return tradeoff decided by the fund manager. The broad framework of the OASIS Committee report therefore has much to be commended.

However, it attempts to create a class of financial intermediaries to manage pensions which are isolated from other financial institutions. In any economy, there are institutions like mutual funds and insurance companies that provide services that have similarities to what the pension funds would offer. By keeping them as distinct entities, regulated by a new regulator different from either the capital market regulator (SEBI) or the insurance regulator (IRDA), the OASIS proposals would perhaps impede the full play of scale and scope economies and restrict the pace of financial innovation. Investors would probably have more choice if pension products were fully integrated into the panoply of financial products available in the economy. The financial sector would also be more efficient and vibrant if that were done.

In this context, this paper argues that pension fund reforms should be placed in the broader context of capital market development aimed at providing investors with a range of choices on risk, liquidity and maturity. It must be recognized that investors save for life cycle reasons as well as for shorter term income smoothing and for hedging human capital. Since there are no watertight compartments between these various investment needs, artificial barriers between different types of financial products and services do not serve investor interests.

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Conclusion

A very deep study has been made which shows the relationship direct economic variables and the market variables and the interrelationship between them. Thus it has been observed that there is not a single factor that acts the movement in the stock market but a number of variables like GDP, P/E, etc. influence a market to a great extent.

Any investor before making an investment should analyses the general economic condition prevailing in the economy and should make a suitable framework for investment decisions.in the Maslow’s hierarchy we learn that before a company goes for overseas expansion it tries to study in which state of Maslow’s hierarchy the desired country (India) is in. This makes the prediction of the various variable accurate to some extent.

Along with the fundamental analysis mentioned above an educated investor would always emphasize the importance of technical analysis as a tool to maximize profits and minimize risk. It is a common view of experts that fundamental or technical analysis by itself are strong indicator to use before investing, however, an educated investor should always use technical and fundamental analysis intended before making an Investment. This would give the investor a holistic view and hence a more informed view of the investment.

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Bibliography

Websites: -www.bseindia.com

www.nseindia.com

www.valuresearch.com

www.google.com

www.mooneychimp.com

www.amfi-india.com

www.investopedia.com

www.sebi.gov.in

www.rbi.org.in

www.finmin.nic.in

Books and Magazines: -

Indian Securities Market: A Review - NSEIL publication

NSE Newsletters

SC(R) A, 1956 & Rules

SEBI Act, 1992, Rules & Regulations

Depository Act, 1996 & Rules

Rules, Regulations and Byelaws of NSEIL & NSCCL

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