orgin and development of indian sensex

8/3/2019 Orgin and Development of Indian Sensex

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BSE Sensex orBombay Stock Exchange Sensitivity Index

is a value-weighted index composed of 30 stocks that started January 1,1986. The Sensex is regarded as the pulse of the domestic stock markets

in India. It consists of the 30 largest and most actively traded stocks,representative of various sectors, on the Bombay Stock Exchange. Thesecompanies account for around fifty per cent of the market capitalisationof the BSE. The base value of the sensex is 100 on April 1, 1979, andthe base year of BSE-SENSEX is 1978-79.

At a regular intervals, the Bombay Stock Exchange (BSE) authoritiesreview and modify its composition to be sure it reflects current marketconditions. The index is calculated based on a free-float capitalizationmethod; a variation of the market cap method. Instead of using acompany's outstanding shares it uses its float, or shares that are readilyavailable for trading. The free-float method, therefore, does not includerestricted stocks, such as those held by promoters, government andstrategic investors.

Initially, the index was calculated based on the full marketcapitalization method. However this was shifted to the free float method

with effect from September 1, 2003. Globally, the free float marketcapitalization is regarded as the industry best practice.

As per free float capitalization methodology, the level of index at anypoint of time reflects the free float market value of 30 component stocksrelative to a base period. The Market Capitalization of a company isdetermined by multiplying the price of its stock by the number of sharesissued by the company. This Market capitalization is multiplied by a freefloat factor to determine the free float market capitalization. Free float

factor is also referred as adjustment factor. Free float factor represent thepercentage of shares that are readily available for trading.

The Calculation of Sensex involves dividing the free float marketcapitalization of 30 companies in the index by a number called Indexdivisor.The Divisor is the only link to original base period value of the


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Sensex. It keeps the index comparable over time and is the adjustmentpoint for all Index adjustments arising out of corporate actions,replacement of scrips, etc.

The index has increased by over ten times from June 1990 to the present.Using information from April 1979 onwards, the long-run rate of returnon the BSE Sensex works out to be 18.6% per annum, which translatesto roughly 9% per annum after compensating for inflation

Sensex milestones

Here is a timeline on the rise of the Sensex through Indian stock market

history.

y 1000, July 25,1990 - On July 25, 1990, the Sensex touched thefour-digit figure for the first time and closed at 1,001 in the wakeof a good monsoon and excellent corporate results.

y 2000, January 15,1992 - On January 15, 1992, the Sensexcrossed the 2,000-mark and closed at 2,020 followed by the liberaleconomic policy initiatives undertaken by the then finance ministerand current Prime Minister Dr Manmohan Singh.

y 3000, February 29,1992 - On February 29, 1992, the Sensexsurged past the 3000 mark in the wake of the market-friendlyBudget announced by Manmohan Singh.

y 4000, March 30,1992 - On March 30, 1992, the Sensex crossedthe 4,000-mark and closed at 4,091 on the expectations of a liberalexport-import policy. It was then that the Harshad Mehta scam hit

the markets and Sensex witnessed unabated selling.y 5000, October 11,1999 - On October 8, 1999, the Sensex crossed

the 5,000-mark as the Bharatiya Janata Party-led coalition won themajority in the 13th Lok Sabha election.


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y 6000, February 11, 2000 - On February 11, 2000, the informationtechnology boom helped the Sensex to cross the 6,000-mark andhit and all time high of 6,006.

y 7000, June 21, 2005 - On June 20, 2005, the news of thesettlement between the Ambani brothersboosted investorsentiments and the scrips of RIL, Reliance Energy, RelianceCapital and IPCL made huge gains. This helped the Sensex crossed7,000 points for the first time.

y 8000, September 8, 2005 - On September 8, 2005, the BombayStock Exchange's benchmark 30-share index the Sensex -crossed the 8000 level following brisk buying by foreign anddomestic funds in early trading.

y 9000, December 9, 2005 - The Sensex on November 28, 2005crossed 9000 to touch 9000.32 points during mid-session at theBombay Stock Exchange on the back of frantic buying spree byforeign institutional investors and well supported by localoperators as well as retail investors.

y 10,000,February 7

,2006 - The Sensex on February 6, 2006touched 10,003 points during mid-session. The Sensex finally

closed above the 10,000-mark on February 7, 2006.

y 11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed11,000 and touched a peak of 11,001 points during mid-session atthe Bombay Stock Exchange for the first time. However, it was onMarch 27, 2006 that the Sensex first closed at over 11,000 points.

y 12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed12,000 and touched a peak of 12,004 points during mid-session atthe Bombay Stock Exchange for the first time.


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y 13,000, October 30, 2006 - The Sensex on October 30, 2006crossed 13,000 for the first time. It touched a peak of 13,039.36and finally closed at 13,024.26.

y 14000, December 5, 2006 - The Sensex on December 5, 2006crossed 14,000.

y 15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000mark.

y 16,000, September 19, 2007 - The Sensex on September 19, 2007crossed the 16,000 mark.

y 17,000, September 26, 2007 - The Sensex on September 26, 2007crossed the 17,000 mark for the first time.

y 18,000, October 9, 2007 - The Sensex on October 9, 2007 crossedthe 18,000 mark for the first time.

y 19,000, October 15, 2007 - The Sensex on October 15, 2007crossed the 19,000 mark for the first time.

y 20,000, October 29, 2007 - The Sensex on October 29, 2007crossed the 20,000 mark for the first time.

y 21,000, Jan 08, 2008 - The Sensex on January 8, 2008 touched alltime peak of 21078 before closing at 20873

May 2006

On May 22, 2006, the Sensex plunged by 1100 points during intra-daytrading, leading to the suspension of trading for the first time since May17, 2004. The volatility of the Sensex had caused investors to lose Rs 6lakh crore (US$131 billion) within seven trading sessions. The FinanceMinister of India, P. Chidambaram, made an unscheduled press


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statement when trading was suspended to assure investors that nothingwas wrong with the fundamentals of the economy, and advised retailinvestors to stay invested. When trading resumed after the reassurancesof the Reserve Bank of India and the Securities and Exchange Board of

India (SEBI), the Sensex managed to move up 700 points, still 450points in the red.

The Sensex eventually recovered from the volatility, and on October 16,2006, the Sensex closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a result of increased confidence in theeconomy and reports that India's manufacturing sector grew by 11.1% inAugust 2006.

y 13,000, October 30, 2006 - The Sensex on October 30, 2006crossed 13,000 and still riding high at the Bombay Stock Exchangefor the first time. It took 135 days to reach 13,000 from 12,000.And 124 days to reach 13,000 from 12,500. On October 30, 2006 ittouched a peak of 13,039.36 & closed at 13,024.26.

y 14,000, December 5, 2006 - The Sensex on December 5, 2006crossed 14,000 and touched a peak of 14028 at 9.58AM(IST) while

opening for the day December 5, 2006.

y 15,000, July 6, 2007- The Sensex on July 6, 2007 crossed anothermilestone and reached a magic figure of 15,000. it took almost 7month and 1 day to touch such a historic milestone. Coincidentally,Sachin Tendulkar achieved the same mark (15000 runs ininternational cricket) around the same time. (A refrain at that timewas, "Sachin, make runs, so that the Sensex rises too!")

[edit] May 2009

On May 18, 2009, the sensex surged 2110.79 points from the previousclosing of 12174.42 this leading to the suspension of trade for the wholeday.This event created history in Dalal Street, by being the first evertime that trade had been suspended for an increase in value. This rally is


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primarily due to the victory of the UPA in the 15th General elections.Trading was open for that day only for 55 seconds. Initially 25 secondsand 30 seconds market reached upper freeze limit twice in that day itself.

[edit] Effects of the Subprime crisis in the U.S

On Monday July 23, 2007, the Sensex touched a new height of 15,733points. On July 27, 2007 the Sensex witnessed a huge correction becauseof selling by Foreign Institutional Investor (FII)s and global cues tocome back to 15,160 points by noon. Following global cues and heavyselling in the international markets, the BSE Sensex fell by 615 points ina single day on Wednesday August 1, 2007.

y 16,000, September 19, 2007- The Sensex (Sensitivity Index) onSeptember 19, 2007 crossed the 16,000 mark and reached ahistoric peak of 16322 while closing. The bull hits because of therate cut of 50 bit/s in the discount rate by the Fed chief BenBernanke on September 26, 2007 crossed the 17,000 mark for thefirst time, creating a record for the second fastest 1000 point gainin just 5 trading sessions. It failed however to sustain themomentum and closed below 17000. The Sensex closed above

17000 for the first time on the following day. Reliance group hasbeen the main contributor in this bull run, contributing 256 points.This also helped Mukesh Ambani's net worth to grow to over $50

billion or Rs.2 trillion. It was also during this record bull run thatthe Sensex for the first time zoomed ahead of the Nikkei of Japan.

y 18,000, October 9, 2007- The Sensex crossed the 18k mark for thefirst time on October 9, 2007. The journey from 17k to 18k took

just 8 trading sessions which is the third fastest 1000 point rise in

the history of the sensex. The sensex closed at 18,280 at the end ofday. This 788 point gain on October 9 was the second biggestsingle day absolute gains.

y 19,000, October 15, 2007- The Sensex crossed the 19k mark forthe first time on October 15, 2007. It took just 4 days to reach from


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18k to 19k. This is the fastest 1000 points rally ever and also the640 point rally was the second highest single day rally in absoluteterms. This made it a record 3000 point rally in 17 trading sessionsoverall.

Therefore the US Subprime crisis has a great effect even on INDIA.goldcross the psychological barrier.

[edit] Participatory notes issue

On October 16, 2007, SEBI (Securities & Exchange Board of India)proposed curbs on participatory notes which accounted for roughly 50%of FII investment in 2007. SEBI was not happy with P-notes because it

was not possible to know who owned the underlying securities, andhedge funds acting through P-notes might therefore cause volatility inthe Indian markets.

However the proposals of SEBI were not clear and this led to a knee-jerkcrash when the markets opened on the following day (October 17, 2007).Within a minute of opening trade, the Sensex crashed by 1744 points orabout 9% of its value - the biggest intra-day fall in Indian stock markets

in absolute terms till then. This led to automatic suspension of trade for1 hour. Finance Minister P. Chidambaram issued clarifications, in themeantime, that the government was not against FIIs and was notimmediately banning PNs. After the market opened at 10:55 AM, theindex staged a comeback and ended the day at 18715.82, down 336.04from the last day's close.

This was, however not the end of the volatility. The next day (October18, 2007), the Sensex tumbled by 717.43 points 3.83 per cent to

17998.39. The slide continued the next day when the Sensex fell 438.41points to settle at 17559.98 at the end of the week, after touching thelowest level of that week at 17226.18 during the day.


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After detailed clarifications from the SEBI chief M. Damodaranregarding the new rules, the market made a 879-point gain on October23, thus signalling the end of the PN crisis.

y 20,000, October 29, 2007- The Sensex crossed the 20k mark forthe first time with a massive 734.5 point gain but closed below the20k mark. It took 11 days to reach from 19k to 20k. The journey ofthe last 10,000 points was covered in just 869 sessions as against7,297 sessions taken to touch the 10,000 mark from 1,000 levels.In 2007 alone, there were six 1,000-point rallies for the Sensex.

y 21,000, January 8, 2008 Business Standard

[edit] January 2008

In the third week of January 2008, the Sensex experienced huge fallsalong with other markets around the world. On January 21, 2008, theSensex saw its highest ever loss of 1,408 points at the end of the session.The Sensex recovered to close at 17,605.40 after it tumbled to the day'slow of 16,963.96, on high volatility as investors panicked followingweak global cues amid fears of a recession in the US.

The next day, the BSE Sensex index went into a free fall. The index hitthe lower circuit breaker in barely a minute after the markets opened at10 AM. Trading was suspended for an hour. On reopening at 10.55 AMIST, the market saw its biggest intra-day fall when it hit a low of 15,332,down 2,273 points. However, after reassurance from the FinanceMinister of India, the market bounced back to close at 16,730 with a lossof 875 points.[4]

Over the course of two days, the BSE Sensex in India dropped from19,013 on Monday morning to 16,730 by Tuesday evening or a two dayfall of 13.9%.[4]

y 9,975, October 17, 2008 - Sensex crashes below the psychological5 figure mark of 10K, following extremely negative global


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financial indications in US and other countries. Exactly one yearback in October 2007, Sensex had gone past the 20K mark.

y 8701.07, October 24, 2008 lost 10.96% of its value on the intra

day trade, the 3rd highest loss for a one day period in itshistory

[edit] Major crashes since 2000

[edit] May 2006

On May 22, 2006, the Sensex plunged by 1100 points during intra-daytrading, leading to the suspension of trading for the first time since May

17, 2004. The volatility of the Sensex had caused investors to lose Rs 6lakh crore ($131 billion) within seven trading sessions. The FinanceMinister of India, P. Chidambaram, made an unscheduled pressstatement when trading was suspended to assure investors that nothingwas wrong with the fundamentals of the economy, and advised retailinvestors to stay invested. When trading resumed after the reassurancesof the Reserve Bank of India and the Securities and Exchange Board ofIndia (SEBI), the Sensex managed to move up 700 points, still 450

points in the red.The Sensex eventually recovered from the volatility, and on October 16,2006, the Sensex closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a result of increased confidence in theeconomy and reports that India's manufacturing sector grew by 11.1% inAugust 2006.

[edit] Effects of the subprime crisis in the U.S.

On July 23, 2007, the Sensex touched a new high of 15,733 points. OnJuly 27, 2007 the Sensex witnessed a huge correction because of selling

by Foreign Institutional Investors and global cues to come back to15,160 points by noon. Following global cues and heavy selling in the


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international markets, the BSE Sensex fell by 615 points in a single dayon August 1, 2007.

[edit] Participatory notes issue

On October 16, 2007, SEBI (Securities & Exchange Board of India)proposed curbs on participatory notes which accounted for roughly 50%of FII investment in 2007. SEBI was not happy with P-notes because itwas not possible to know who owned the underlying securities, andhedge funds acting through P-notes might therefore cause volatility inthe Indian markets.

However the proposals of SEBI were not clear and this led to a knee-jerk

crash when the markets opened on the following day (October 17, 2007).Within a minute of opening trade, the Sensex crashed by 1744 points orabout 9% of its value - the biggest intra-day fall in Indian stock marketsin absolute terms till then. This led to automatic suspension of trade for1 hour. Finance Minister P. Chidambaram issued clarifications, in themeantime, that the government was not against FIIs and was notimmediately banning PNs. After the market opened at 10:55 AM, theindex staged a comeback and ended the day at 18715.82, down 336.04

from the last day's close.

This was, however not the end of the volatility. The next day (October18, 2007), the Sensex tumbled by 717.43 points 3.83 per cent to17998.39. The slide continued the next day when the Sensex fell 438.41

points to settle at 17559.98 at the end of the week, after touching thelowest level of that week at 17226.18 during the day.

After detailed clarifications from the SEBI chief M. Damodaran

regarding the new rules, the market made a 879-point gain on October23, thus signalling the end of the PN crisis.

[edit] January 2008


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In the third week of January 2008, the Sensex experienced huge fallsalong with other markets around the world. On January 21, 2008, theSensex saw its highest ever loss of 1,408 points at the end of the session.The Sensex recovered to close at 17,605.40 after it tumbled to the day's

low of 16,963.96, on high volatility as investors panicked followingweak global cues amid fears of a recession in the US.

The next day, the BSE Sensex index went into a free fall. The index hitthe lower circuit breaker in barely a minute after the markets opened at10 AM. Trading was suspended for an hour. On reopening at 10.55 AMIST, the market saw its biggest intra-day fall when it hit a low of 15,332,down 2,273 points. However, after reassurance from the Finance

Minister of India, the market bounced back to close at 16,730 with a lossof 875 points.[4]

Over the course of two days, the BSE Sensex in India dropped from19,013 on Monday morning to 16,730 by Tuesday evening or a two dayfall of 13.9%.[4]

Companies in the Sensex

L

ist of BSE Sensex companies provides the full list of companies thathave been part of the BSE Sensex since its inception in 1986(baselined

to 1979).

(as of Feb 26, 2010)[5][6] Lifetime highest 3 rises in history (highest rise

was in 2009 when second time upa government won the election)

Code Name SectorAdj.

Factor

Weight in

Index(%)

500410 ACC Housing Related 0.55 0.77500103 BHEL Capital Goods 0.35 3.26

532454 Bharti Airtel Telecom 0.35 3

532868DLF UniversalLimited

Housing related 0.25 1.02


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500300 Grasim Industries Diversified 0.75 1.5

500010 HDFC Finance 0.90 5.21

500180 HDFC Bank Finance 0.85 5.03

500182 Hero Honda MotorsLtd. TransportEquipments 0.50 1.43

500440Hindalco IndustriesLtd.

Metal,MetalProducts &Mining

0.7 1.75

500696Hindustan LeverLimited

FMCG 0.50 2.08

532174 ICICI Bank Finance 1.00 7.86

500209 Infosys InformationTechnology

0.85 10.26

500875 ITC Limited FMCG 0.70 4.99

532532JaiprakashAssociates

Housing Related 0.55 1.25

500510 Larsen & Toubro Capital Goods 0.90 6.85

500520Mahindra &Mahindra Limited

TransportEquipments

0.75 1.71

532500 Maruti SuzukiTransportEquipments

0.50 1.71

532541 NIIT Technologies InformationTechnology

0.15 2.03

532555 NTPC Power 0.15 2.03

500304 NIITInformationTechnology

0.15 2.03

500312 ONGC Oil & Gas 0.20 3.87

532712RelianceCommunications

Telecom 0.35 0.92

500325 Reliance Industries Oil & Gas 0.50 12.94

500390 Reliance Power 0.65 1.19


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Infrastructure

500112 State Bank of India Finance 0.45 4.57

500900 Sterlite Industries

Metal, Metal

Products, andMining 0.45 2.39

524715Sun PharmaceuticalIndustries

Healthcare 0.40 1.03

532540Tata ConsultancyServices

InformationTechnology

0.25 3.61

500570 Tata MotorsTransportEquipments

0.55 1.66

500400 Tata Power

Power 0.70 1.63

500470 Tata SteelMetal, MetalProducts &Mining

0.70 2.88

507685 WiproInformationTechnology

0.20 1.61

y DLF replaced Dr. Reddy's Lab on November 19, 2007.

y Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March14,2008.

y Sterlite Industries replaced Ambuja Cements on July 28, 2008.y Tata Power Company replaced Cipla Ltd. on July 28, 2008.y Sun Pharmaceutical Industries replaced Satyam Computer Services

on January 8, 2009y Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009y Cipla to replace Sun Pharma from May 3, 2010y JSPL replaced Grasim in 2010

[edit] Sensex falls

Some major single-day falls of the Sensex have occurred on thefollowing dates [1]:


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1.January 21, 2008 --- 1,408.35 points2.Oct 24, 2008---1070.63 points3.March 17, 2008 --- 951.03 points4.July 6, 2009 --- 870 points

5.January 22, 2008 --- 857 points6.February 11, 2008 --- 833.98 points7.May 18, 2006 --- 826 points8.October 10, 2008 --- 800.10 points9.March 13, 2008 --- 770.63 points10. December 17, 2007 --- 769.48 points11. January 7, 2009 --- 749.05 points12. March 31, 2007 --- 726.85 points

13. October 6, 2008 --- 724.62 points14. October 17, 2007 --- 717.43 points15. September 15, 2008 --- 710.00 points16. January 18, 2007 --- 687.82 points17. November 21, 2007 --- 678.18 points18. August 16, 2007 --- 642.70 points19. August 17, 2009 --- 626.71 points20. June 27, 2008 --- 600.00 points


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SENSEX - The Barometer of Indian Capital Markets

IntroductionSENSEX, first compiled in 1986, was calculated on a "MarketCapitalization-Weighted" methodology of 30 component stocksrepresenting large, well-established and financially soundcompanies across key sectors. The base year of SENSEX wastaken as 1978-79. SENSEX today is widely reported in bothdomestic and international markets through print as well aselectronic media. It is scientifically designed and is based onglobally accepted construction and review methodology. SinceSeptember 1, 2003, SENSEX is being calculated on a free-floatmarket capitalization methodology. The "free-float marketcapitalization-weighted" methodology is a widely followed indexconstruction methodology on which majority of global equityindices are based; all major index providers like MSCI, FTSE,STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal inthe present decade. Right from early nineties, the stock marketwitnessed heightened activity in terms of various bull and bearruns. In the late nineties, the Indian market witnessed a hugefrenzy in the 'TMT' sectors. More recently, real estate caught thefancy of the investors. SENSEX has captured all thesehappenings in the most judicious manner. One can identify thebooms and busts of the Indian equity market through SENSEX.As the oldest index in the country, it provides the time series dataover a fairly long period of time (from 1979 onwards). Smallwonder, the SENSEX has become one of the most prominentbrands in the country.


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SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization"methodology, wherein, the level of index at any point of time

reflects the free-float market value of 30 component stocksrelative to a base period. The market capitalization of a companyis determined by multiplying the price of its stock by the number ofshares issued by the company. This market capitalization isfurther multiplied by the free-float factor to determine the free-floatmarket capitalization.

The base period of SENSEX is 1978-79 and the base value is100 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 anumber called the Index Divisor. The Divisor is the only link to theoriginal base period value of the SENSEX. It keeps the Indexcomparable over time and is the adjustment point for all Indexadjustments arising out of corporate actions, replacement ofscrips etc. During market hours, prices of the index scrips, atwhich latest trades are executed, are used by the trading system

to calculate SENSEX on a continuous basis.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX andhistorical values of this index are available since its inception. (Formore details click 'Dollex series ofBSE indices')

SENSEX - Scrip Selection Criteria

The general guidelines for selection of constituents in SENSEXare as follows:

1.Listed History:The scrip should have a listing history of atleast 3 months at BSE. Exception may be considered if full


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market capitalization of a newly listed company ranks amongtop 10 in the list ofBSE universe. In case, a company islisted on account of merger/ demerger/ amalgamation,minimum listing history would not be required.

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

3.Final Rank:The scrip should figure in the top 100 companieslisted by final rank. The final rank is arrived at by assigning

75% weightage to the rank on the basis of three-monthaverage full market capitalization and 25% weightage to theliquidity rank based on three-month average daily turnover &three-month average impact cost.

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

5. Industry/Sector Representation:Scrip selection wouldgenerally take into account a balanced representation of thelisted companies in the universe ofBSE.

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

Understanding Free-float Methodology

Concept

Free-float methodology refers to an index constructionmethodology that takes into consideration only the free-float


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market capitalization of a company for the purpose of indexcalculation and assigning weight to stocks in the index. Free-floatmarket capitalization takes into consideration only those sharesissued by the company that are readily available for trading in the

market. It generally excludes promoters' holding, governmentholding, strategic holding and other locked-in shares that will notcome to the market for trading in the normal course. In otherwords, the market capitalization of each company in a free-floatindex is reduced to the extent of its readily available shares in themarket.

Subsequently all BSE indices with the exception ofBSE-PSU

index have adopted the free-float methodology.Major advantages of Free-float Methodology

y A Free-float index reflects the market trends more rationallyas it takes into consideration only those shares that areavailable for trading in the market.

y Free-float Methodology makes the index more broad-based

by reducing the concentration of top few companies in Index.

y A Free-float index aids both active and passive investingstyles. It aids active managers by enabling them tobenchmark their fund returns vis- -vis an investible index.This enables an apple-to-apple comparison therebyfacilitating better evaluation of performance of activemanagers. Being a perfectly replicable portfolio of stocks, aFree-float adjusted index is best suited for the passivemanagers as it enables them to track the index with the leasttracking error.

y Free-float Methodology improves index flexibility in terms ofincluding any stock from the universe of listed stocks. This


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improves market coverage and sector coverage of the index.For example, under a Full-market capitalizationmethodology, companies with large market capitalizationand low free-float cannot generally be included in the Index

because they tend to distort the index by having an undueinfluence on the index movement. However, under the Free-float Methodology, since only the free-float marketcapitalization of each company is considered for indexcalculation, it becomes possible to include such closely-heldcompanies in the index while at the same time preventingtheir undue influence on the index movement.

y Globally, the Free-float Methodology of index construction isconsidered to be an industry best practice and all majorindex providers like MSCI, FTSE, S&P and STOXX haveadopted 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 byForeign Institutional Investors (FIIs) to track Indian equities,is also based on the Free-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

Shareholding of investors that would not, in the normal coursecome into the open market for trading are treated as 'Controlling/Strategic Holdings' and hence not included in free-float.

Specifically, the following categories of holding are generallyexcluded from the definition of Free-float:

y Shares held by founders/directors/ acquirers which hascontrol element


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y Shares held by persons/ bodies with "Controlling Interest"

y Shares held by Government as promoter/acquirer

y Holdings through the FDI Route

y Strategic stakes by private corporate bodies/ individuals

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

y Equity held by Employee Welfare Trusts

y Locked-in shares and shares which would not be sold in theopen market in normal course.

The remaining shareholders fall under the Free-floatcategory.

Determining Free-float Factors of Companies

BSE has designed a Free-float format, which is filled andsubmitted by all index companies on a quarterly basis. (Formatavailable on www.bseindia.com). BSE determines the Free-floatfactor for each company based on the detailed informationsubmitted by the companies in the prescribed format. Free-floatfactor is a multiple with which the total market capitalization of acompany is adjusted to arrive at the Free-float marketcapitalization. Once the Free-float of a company is determined, itis rounded-off to the higher multiple of 5 and each company iscategorized into one of the 20 bands given below. A Free-floatfactor of say 0.55 means that only 55% of the marketcapitalization of the company will be considered for indexcalculation.

Free-float Bands:


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% Free-Float

Free-FloatFactor

% Free-Float

Free-FloatFactor

>0 - 5% 0.05 >50 - 55% 0.55

>

5 - 10% 0.10>

55 - 60% 0.60>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

Index Closure Algorithm

The closing SENSEX on any trading day is computed taking theweighted average of all the trades on SENSEX constituents in thelast 30 minutes of trading session. If a SENSEX constituent hasnot traded in the last 30 minutes, the last traded price is taken forcomputation of the Index closure. If a SENSEX constituent hasnot traded at all in a day, then its last day's closing price is takenfor computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closingindex value.

Maintenance of SENSEX

One of the important aspects of maintaining continuity with thepast is to update the base year average. The base year valueadjustment ensures that replacement of stocks in Index,additional issue of capital and other corporate announcementslike 'rights issue' etc. do not destroy the historical value of theindex. The beauty of maintenance lies in the fact that adjustments


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for corporate actions in the Index should not per se affect theindex values.

The BSE Index Cell does the day-to-day maintenance of the

index within the broad index policy framework set by the BSEIndex Committee. The BSE Index Cell ensures that SENSEX andall the otherBSE indices maintain their benchmark properties bystriking a delicate balance between frequent replacements inindex and maintaining its historical continuity. The BSE IndexCommittee comprises of capital market expert, fund managers,market participants and members of the BSE Governing Board.

On-Line Computation of the Index

During trading hours, value of the Index is calculated anddisseminated on real time basis. This is done automatically on thebasis of prices at which trades in Index constituents are executed.

Adjustment for Bonus, Rights and Newly Issued Capital

SENSEX calculation needs to be adjusted for issue ofBonus orRights shares If no adjustments were made, a discontinuity wouldarise between the current value of the index and its previousvalue despite the non-occurrence of any economic activity ofsubstance. At the BSE Index Cell , the base value is adjusted,which is used to alter market capitalization of the componentstocks to arrive at the SENSEX value.

The BSE Index Cell keeps a close watch on the events that mightaffect the index on a regular basis and carries out daily

maintenance of all BSE Indices.

y Adjustments for Rights IssuesWhen a company, included in the compilation of the index,issues right shares, the free-float market capitalization of thatcompany is increased by the number of additional shares


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issued based on the theoretical (ex-right) price. An offsettingor proportionate adjustment is then made to the Base Marketcapitalization (see 'Base Market capitalization Adjustment'below).

y Adjustments for Bonus IssueWhen a company, included in the compilation of the index,issues bonus shares, the market capitalization of thatcompany does not undergo any change. Therefore, there isno change in the Base Market capitalization, only the'number of shares' in the formula is updated.

y Other IssuesBase Market capitalization adjustment is required when newshares are issued by way of conversion of debentures,mergers, spin-offs etc. or when equity is reduced by way ofbuy-back of shares, corporate restructuring etc.

y Base Market capitalization Adjustment

The formula for adjusting the Base Market capitalization is as

follows:

New Market capitalizationNew Base Market capitalization = Old Base Market capitalizationx ---------------------------------------

OldMarket capitalization

To illustrate, suppose a company issues right shares whichincreases the market capitalization of the shares of that companyby say, Rs.100 crores. The existing Base Market capitalization(Old Base Market capitalization), say, is Rs.2450 crores and theaggregate market capitalization of all the shares included in the


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index before the right issue is made is, say Rs.4781 crore. The"New Base Market capitalization " will then be:

2450 x (4781+100)

-------------------------- = Rs.2501.24 crores4781

This figure of Rs. 2501.24 crore will be used as the Base Marketcapitalization for calculating the index number from then onwardstill the next base change becomes necessary.

Index Review Frequency

The BSE Index Committee meets every quarter to discuss indexrelated issues. In case of a revision in the Index constituents, theannouncement of the incoming and outgoing scrips is made sixweeks in advance of the actual implementation of the revision ofthe Index.

What is the BSE Sensex

The BSE Sensex Index is the value-weighted average for the BombayStock Exchange. The Sensex is comprised of the 30 blue chip stocksfrom the Bombay Stock Exchange and is the equivalent to the DowJones in India. These top 30 stocks account for one-fifth of all themarket capitalization on the Bombay Stock Exchange. Since these

basket of stocks reflect the broader Indian Stock Market, the Sensex isrecognized around the world as the key indicator for the health of theIndian economy.

History of the BSE Sensex

The Sensex started with a base value of 100 and tracking began for theindex on April 1, 1979. The Sensex officially began being published tothe world in April, 1984. The Sensex is the oldest index in India.


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How is the Sensex Calculated

The BSE Sensex is calculated using the Free-float Market CapitalizationModel. The market capitalization is determined by multiplying the stock

by the numbers of outstanding shares. This calculation is performed forall 30 stocks and then divided by the Sensex Divisor. The Divisor isderived from the original base value of 100 for the Sensex, so the indexcan be tracked over time. The Sensex is calculated every 15 secondsand then published to investors around the world in real-time.

Sensex Components

Below are the components of the Sensex as of September, 2008.

Name SectorAdj.

Factor

ACC Housing Related 0.60

BHEL Capital Goods 0.35

Bharti Airtel Telecom 0.35

DLF Universal Limited Housing related 0.15Grasim Industries Diversified 0.75

HDFC Finance 0.85

HDFC Bank Finance 0.85

Hindalco IndustriesMetal, Metal Products &Mining

0.70

Hindustan Lever Limited FMCG 0.50

ICICI Bank Finance 1.00Infosys Information Technology 0.85

ITC Limited FMCG 0.70

Jaiprakash Associates Housing Related 0.60

Larsen & Toubro Capital Goods 0.90


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Mahindra & MahindraLimited

Transport Equipments 0.80

Maruti Udyog Transport Equipments 0.50

NTPC Power ONGC Oil & Gas 0.20

Ranbaxy Laboratories Healthcare 0.70

Reliance Communications Telecom 0.35

Reliance Industries Oil & Gas 0.50

Reliance Infrastructure Power 0.65

Satyam Computer Services Information Technology 0.95

State Bank of India Finance 0.45

Sterlite IndustriesMetal, Metal Products &Mining

0.40

Tata Consultancy Services Information Technology 0.25

Tata Motors Transport Equipments 0.60

Tata Power Power 0.70

Tata SteelMetal, Metal Products &Mining

0.70

Wipro Information Technology 0.20

BSE Sensex Chart Example

Below is the chart example of the BSE Sensex. Notice how the Sensextook a free fall from 14,215.33 to a low of 7,697.39 in three weeks as a

result of the 2008 credit crisis.


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Overview of Stock market and Stock exchanges in

India

Introduction

In general, the financial market divided into two parts,Money market and capital market. Securities market isan important, organized capital market where transactionof capital is facilitated by means of direct financing usingsecurities as a commodity. Securities market can bedivided into a primary market and secondary market.

PRIMARY MARKET

The primary market is an intermittent and discretemarket where the initially listed shares are traded first

time, changing hands from the listed company to theinvestors. It refers to the process through which thecompanies, the issuers of stocks, acquire capital byoffering their stocks to investors who supply the capital.In other words primary market is that part of the capitalmarkets that deals with the issuance of new securities.Companies, governments or public sector institutions canobtain funding through the sale of a new stock or bond

issue. This is typically done through a syndicate ofsecurities dealers. The process of selling new issues toinvestors is called underwriting. In the case of a newstock issue, this sale is called an initial public offering(IPO). Dealers earn a commission that is built into the


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price of the security offering, though it can be found inthe prospectus.

SECONDARY MARKET

The secondary market is an on-going market, which isequipped and organized with a place, facilities and otherresources required for trading securities after their initialoffering. It refers to a specific place where securitiestransaction among many and unspecified persons iscarried out through intermediation of the securities firms,i.e., a licensed broker, and the exchanges, a specialized

trading organization, in accordance with the rules andregulations established by the exchanges.

A bit about history of stock exchange they say it wasunder a tree that it all started in 1875.Bombay StockExchange (BSE) was the major exchange in India till1994.National Stock Exchange (NSE) started operationsin 1994.

NSE was floated by major banks and financialinstitutions. It came as a result of Harshad Mehta scamof 1992. Contrary to popular belief the scam was more ofa banking scam than a stock market scam. The oldmethods of trading in BSE were people assembling onwhat as called a ring in the BSE building. They had aunique sign language to communicate apart from all the

shouting. Investors weren't allowed access and thesystem was opaque and misused by brokers. The shareswere in physical form and prone to duplication and fraud.

NSE was the first to introduce electronic screen basedtrading. BSE was forced to follow suit. The present day


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trading platform is transparent and gives investors priceson a real time basis. With the introduction of depositoryand mandatory dematerialization of shares chances offraud reduced further. The trading screen gives you top 5buy and sell quotes on every scrip.

A typical trading day starts at 10 ending at 3.30. Mondayto Friday. BSE has 30 stocks which make up the Sensex.NSE has 50 stocks in its index called Nifty. FII s Banks,financial institutions mutual funds are biggest players inthe market. Then there are the retail investors andspeculators. The last ones are the ones who follow the

market morning to evening; Market can be very addictivelike blogging though stakes are higher in the former.

ORIGIN OF INDIAN STOCK MARKET

The origin of the stock market in India goes back to theend of the eighteenth century when long-term negotiablesecurities were first issued. However, for all practical

purposes, the real beginning occurred in the middle ofthe nineteenth century after the enactment of thecompanies Act in 1850, which introduced the features oflimited liability and generated investor interest incorporate securities.

An important early event in the development of the stockmarket in India was the formation of the native share

and stock brokers 'Association at Bombay in 1875, theprecursor of the present day Bombay Stock Exchange.This was followed by the formation ofassociations/exchanges in Ahmedabad (1894), Calcutta(1908), and Madras (1937). In addition, a large numberof ephemeral exchanges emerged mainly in buoyant


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periods to recede into oblivion during depressing timessubsequently.

Stock exchanges are intricacy inter-woven in the fabric of

a nation's economic life. Without a stock exchange, thesaving of the community- the sinews of economicprogress and productive efficiency- would remainunderutilized. The task of mobilization and allocation ofsavings could be attempted in the old days by a muchless specialized institution than the stock exchanges. Butas business and industry expanded and the economyassumed more complex nature, the need for 'permanent

finance' arose. Entrepreneurs needed money for longterm whereas investors demanded liquidity the facilityto convert their investment into cash at any given time.The answer was a ready market for investments and thiswas how the stock exchange came into being.

Stock exchange means any body of individuals, whetherincorporated or not, constituted for the purpose of

regulating or controlling the business of buying, selling ordealing in securities. These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock orother marketable securities of a like nature in or of anyincorporated company or other body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the NationalStock Exchange of India Ltd (NSE) are the two primaryexchanges in India. In addition, there are 22 Regional


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Stock Exchanges. However, the BSE and NSE haveestablished themselves as the two leading exchanges andaccount for about 80 per cent of the equity volumetraded in India. The NSE and BSE are equal in size interms of daily traded volume. The average daily turnoverat the exchanges has increased from Rs 851 crore in1997-98 to Rs 1,284 crore in 1998-99 and further to Rs2,273 crore in 1999-2000 (April - August 1999). NSE hasaround 1500 shares listed with a total marketcapitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market

capitalization of around Rs 9, 68,000 crore. Most keystocks are traded on both the exchanges and hence theinvestor could buy them on either exchange. Bothexchanges have a different settlement cycle, whichallows investors to shift their positions on the bourses.The primary index of BSE is BSE Sensex comprising 30stocks. NSE has the S&P NSE 50 Index (Nifty) whichconsists of fifty stocks. The BSE Sensex is the older andmore widely followed index.

Both these indices are calculated on the basis of marketcapitalization and contain the heavily traded shares fromkey sectors. The markets are closed onSaturdaysand Sundays. Both the exchanges have switched overfrom the open outcry trading system to a fully automatedcomputerized mode of trading known as BOLT (BSE on

Line Trading) and NEAT (National Exchange AutomatedTrading) System.

It facilitates more efficient processing, automatic ordermatching, faster execution of trades and transparency;the scrip's traded on the BSE have been classified into


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'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group sharesrepresent those, which are in the carry forward system(Badla). The 'F' group represents the debt market (fixedincome securities) segment. The 'Z' group scrip's are theblacklisted companies. The 'C' group covers the odd lotsecurities in 'A', 'B1' & 'B2' groups and Rightsrenunciations. The key regulator governing StockExchanges, Brokers, Depositories, Depositoryparticipants, Mutual Funds, FIIs and other participants inIndian secondary and primary market is the Securitiesand Exchange Board of India (SEBI) Ltd.

Brief History of Stock Exchanges

Do you know that the world's foremost marketplace NewYork Stock Exchange (NYSE), started its trading under atree (now known as 68 Wall Street) over 200 years ago?Similarly, India's premier stock exchange Bombay StockExchange (BSE) can also trace back its origin to as far as125 years when it started as a voluntary non-profit

making association.

News on the stock market appears in different mediaevery day. You hear about it any time it reaches a newhigh or a new low, and you also hear about it daily instatements like 'The BSE Sensitive Index rose 5% today'.Obviously, stocks and stock markets are important.Stocks of public limited companies are bought and sold at

a stock exchange. But what really are stock exchanges?Known also as the stock market or bourse, a stockexchange is an organized marketplace for securities (likestocks, bonds, options) featured by the centralization ofsupply and demand for the transaction of orders bymember brokers, for institutional and individual


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investors.

The exchange makes buying and selling easy. Forexample, you don't have to actually go to a stockexchange, say, BSE - you can contact a broker, who doesbusiness with the BSE, and he or she will buy or sell yourstock on your behalf.

Market Basics

Electronic trading

Electronic trading eliminates the need for physical tradingfloors. Brokers can trade from their offices, using fullyautomated screen-based processes. Their workstationsare connected to a Stock Exchange's central computervia satellite using Very Small Aperture Terminus(VSATs). The orders placed by brokers reach theExchange's central computer and are matchedelectronically.

Exchanges in India

The Stock Exchange, Mumbai (BSE) and the NationalStock Exchange (NSE) are the country's two leadingExchanges. There are 20 other regional Exchanges,connected via the Inter-Connected Stock Exchange(ICSE). The BSE and NSE allow nationwide trading viatheir VSAT systems.

Index

An Index is a comprehensive measure of market trends,intended for investors who are concerned with generalstock market price movements. An Index comprises


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stocks that have large liquidity and market capitalization.Each stock is given a weight age in the Index equivalentto its market capitalization. At the NSE, the capitalizationof NIFTY (fifty selected stocks) is taken as a basecapitalization, with the value set at 1000. Similarly, BSESensitive Index or Sensex comprises 30 selected stocks.The Index value compares the day's market capitalizationvis--vis base capitalization and indicates how prices ingeneral have moved over a period of time.

Execute an order

Select a broker of your choice and enter into a broker-client agreement and fill in the client registration form.Place your order with your broker preferably in writing.Get a trade confirmation slip on the day the trade isexecuted and ask for the contract note at the end of thetrade date.

Need a broker

As per SEBI (Securities and Exchange Board of India.)regulations, only registered members can operate in thestock market. One can trade by executing a deal onlythrough a registered broker of a recognized StockExchange or through a SEBI-registered sub-broker.

Contract note

A contract note describes the rate, date, time at whichthe trade was transacted and the brokerage rate. Acontract note issued in the prescribed format establishesa legally enforceable relationship between the client andthe member in respect of trades stated in the contractnote. These are made in duplicate and the member and


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the client both keep a copy each. A client should receivethe contract note within 24 hours of the executed trade.Corporate Benefits/Action.

Split

A Split is book entry wherein the face value of the shareis altered to create a greater number of sharesoutstanding without calling for fresh capital or alteringthe share capital account. For example, if a companyannounces a two-way split, it means that a share of theface value of Rs 10 is split into two shares of face value

of Rs 5 each and a person holding one share now holdstwo shares.

Buy Back

As the name suggests, it is a process by which acompany can buy back its shares from shareholders. Acompany may buy back its shares in various ways: from

existing shareholders on a proportionate basis; through atender offer from open market; through a book-buildingprocess; from the Stock Exchange; or from odd lotholders.

A company cannot buy back through negotiated deals onor off the Stock Exchange, through spot transactions orthrough any private arrangement.

Settlement cycle

The accounting period for the securities traded on theExchange. On the NSE, the cycle begins on Wednesdayand ends on the following Tuesday, and on the BSE thecycle commences on Monday and ends on Friday. At the


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end of this period, the obligations of each broker arecalculated and the brokers settle their respectiveobligations as per the rules, bye-laws and regulations ofthe Clearing Corporation. If a transaction is entered onthe first day of the settlement, the same will be settledon the eighth working day excluding the day oftransaction. However, if the same is done on the last dayof the settlement, it will be settled on the fourth workingday excluding the day of transaction.

Rolling settlement

The rolling settlement ensures that each day's trade issettled by keeping a fixed gap of a specified number ofworking days between a trade and its settlement. Atpresent, this gap is five working days after the tradingday. The waiting period is uniform for all trades. In aRolling Settlement, all trades outstanding at end of theday have to be settled, which means that the buyer hasto make payments for securities purchased and seller has

to deliver the securities sold. In India, we have adoptedthe T+5 settlement cycle, which means that a transactionentered into on Day 1 has to be settled on the Day 1 + 5working days, when funds pay in or securities pay outtakes place.

What are the advantages ofRolling Settlements?

As mentioned earlier, this is the system practiced indeveloped countries. Pay outs are quicker than in weeklysettlements, and investors will benefit from increasedliquidity. The other benefit of the modified system is thatit keeps cash and forward markets separate. In thecurrent system, the trader has five days to square off his


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transaction which leads to a high level of speculation aspeople even without funds tend to "play" the market.During volatile markets, especially in a bearish market,this often leads to a payment problem which has doggedthe Indian stock exchanges for a long time. It providesfor a higher degree of safety, and once mechanisms suchas futures and stock-lending become popular, it wouldresult in quality speculation and genuine investorinterest.

When does one deliver the shares and pay themoney to broker

As a seller, in order to ensure smooth settlement youshould deliver the shares to your broker immediatelyafter getting the contract note for sale but in any casebefore the pay-in day. Similarly, as a buyer, one shouldpay immediately on the receipt of the contract note forpurchase but in any case before the pay-in day.

Short selling

Short selling is a legitimate trading strategy. It is a saleof a security that the seller does not own, or any salethat is completed by the delivery of a security borrowedby the seller. Short sellers take the risk that they will beable to buy the stock at a more favorable price than theprice at which they "sold short."

The selling of a security that the seller does not own, orany sale that is completed by the delivery of a securityborrowed by the seller, Short sellers assume that theywill be able to buy the stock at a lower amount than theprice at which they sold short.


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Auction

An auction is conducted for those securities thatmembers fail to deliver/short deliver during pay-in. Three

factors primarily give rise to an auction: short deliveries,un-rectified bad deliveries, and un-rectified companyobjections

Separate market for auctions

The buy/sell auction for a capital market security ismanaged through the auction market. As opposed to the

normal market where trade matching is an on-goingprocess, the trade matching process for auction startsafter the auction period is over.

If the shares are not bought in the auction

If the shares are not bought at the auction i.e. if theshares are not offered for sale, the Exchange squares upthe transaction as per SEBI guidelines. The transaction is

squared up at the highest price from the relevant tradingperiod till the auction day or at 20 per cent above the lastavailable Closing price whichever is higher. The pay-inand pay-out of funds for auction square up is held alongwith the pay-out for the relevant auction.

Bad Delivery

SEBI has formulated uniform guidelines for good and baddelivery of documents. Bad delivery may pertain to atransfer deed being torn, mutilated, overwritten, defaced,or if there are spelling mistakes in the name of thecompany or the transfer. Bad delivery exists only when


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shares are transferred physically. In "Demat" baddelivery does not exist.

Stock &Exchange Board of India

REGULATION OF BUSINESS IN THE STOCKEXCHANGES

Under the SEBI Act, 1992, the SEBI has been empoweredto conduct inspection of stock exchanges. The SEBI hasbeen inspecting the stock exchanges once every yearsince 1995-96. During these inspections, a review of the

market operations, organizational structure andadministrative control of the exchange is made toascertain whether:

y the exchange provides a fair, equitable and growingmarket to investors

y the exchange's organization, systems and practicesare in accordance with the Securities Contracts

(Regulation) Act (SC(R) Act), 1956 and rules framedthere undery the exchange has implemented the directions,

guidelines and instructions issued by the SEBI fromtime to time

y The exchange has complied with the conditions, ifany, imposed on it at the time of renewal/ grant ofits recognition under section 4 of the SC(R) Act,

1956.During the year 1997-98, inspection of stock exchangeswas carried out with a special focus on the measurestaken by the stock exchanges for investor's protection.Stock exchanges were, through inspection reports,


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advised to effectively follow-up and redress the investors'complaints against members/listed companies. The stockexchanges were also advised to expedite the disposal ofarbitration cases within four months from the date offiling.

During the earlier years' inspections, commondeficiencies observed in the functioning of the exchangeswere delays in post trading settlement, frequent clubbingof settlements, delay in conducting auctions, inadequatemonitoring of payment of margins by brokers, non-adherence to Capital Adequacy Norms etc. It was

observed during the inspections conducted in 1997-98that there has been considerable improvement in most ofthe areas, especially in trading, settlement, collection ofmargins etc.

Dematerialization

Dematerialization in short called as 'demat' is the

process by which an investor can get physical certificatesconverted into electronic form maintained in an accountwith the Depository Participant. The investors candematerialize only those share certificates that arealready registered in their name and belong to the list ofsecurities admitted for dematerialization at thedepositories.

Depository:The organization responsible to maintaininvestor's securities in the electronic form is called the

depository. In other words, a depository can therefore beconceived of as a "Bank" for securities. In India there aretwo such organizations viz. NSDL and CDSL. Thedepository concept is similar to the Banking system with


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the exception that banks handle funds whereas adepository handles securities of the investors. An investorwishing to utilize the services offered by a depository hasto open an account with the depository throughDepository Participant.

Depository Participant:The market intermediarythrough whom the depository services can be availed bythe investors is called a Depository Participant (DP). Asper SEBI regulations, DP could be organizations involvedin the business of providing financial services like banks,brokers, custodians and financial institutions. This system

of using the existing distribution channel (mainlyconstituting DPs) helps the depository to reach a widecross section of investors spread across a largegeographical area at a minimum cost. The admission ofthe DPs involves a detailed evaluation by the depositoryof their capability to meet with the strict servicestandards and a further evaluation and approval fromSEBI. Realizing the potential, all the custodians in Indiaand a number of banks, financial institutions and majorbrokers have already joined as DPs to provide services ina number of cities .

Advantages of a depository services:

Trading in demat segment completely eliminates the riskof bad deliveries. In case of transfer of electronic shares,

you save 0.5% in stamp duty. Avoids the cost of courier/notarization/ the need for further follow-up with yourbroker for shares returned for company objection No lossof certificates in transit and saves substantial expensesinvolved in obtaining duplicate certificates, when theoriginal share certificates become mutilated or misplaced.


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Lower interest charges for loans taken against dematshares as compared to the interest for loan againstphysical shares. RBI has increased the limit of loansavailed against dematerialized securities as collateral toRs 20 lakh per borrower as against Rs 10 lakh perborrower in case of loans against physical securities. RBIhas also reduced the minimum margin to 25% for loansagainst dematerialized securities, as against 50% forloans against physical securities. Fill up the accountopening form, which is available with the DP. Sign theDP-client agreement, which defines the rights and dutiesof the DP and the person wishing to open the account.Receive your client account number (client ID).

This client id along with your DP id gives you a uniqueidentification in the depository system. Fill up adematerialization request form, which is available withyour DP, Submit your share certificates along with theform; write "surrendered for demat" on the face of thecertificate before submitting it for demat) Receive creditfor the dematerialized shares into your account within 15days.

BIBLIOGRAPHY

* www.moneycontrol.com* www.bseindia.com* www.nseindia.com

* www.sebi.gov.in* www.capitalmarket.com* www.trendwatch.com* http://en.wikipedia.org/wiki/Primary_market* http://www.investopedia.com/terms/s/shortselling.asp


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Annexure-1

1The Stock Exchange, MumbaiPhiroze Jeejeebhoy Towers, Dalal Street, Fort,

Mumbai 400 001

2The Stock Exchange, AhmedabadKamdhenu Complex, Opp. Sahajanand College,Panjara Pole, Ahmedabad 380 015

3Bangalore Stock Exchange Ltd.,Stock Exchange Tower, 51, I Cross, J.C. Road,Bangalore 560 027

4 Bhubaneshwar Stock Exchange Assn. Ltd.,217, Budhraja Building, Jharpada Cuttack Road,Bhubaneshwar 751006

5The Calcutta Stock Exchange Ltd.,7, Lyons Range, Calcutta 700 001

6Cochin Stock Exchange Ltd.,Exchange House, 38/1431, Kaloor Raod Extn,Ernakulam, Cochin 682035 Kerala

7The Delhi Stock Exchange Assn. Ltd. ,DSE HOUSE, 3/1, Asaf Ali Road, New Delhi -110002

8The Gauhati Stock ExchangeSaraf Building Annexe, A.T. Road, Gauwahati 781001

9The Hyderabad Stock ExchangeBank Street, Hyderabad 500 001

10Jaipur Stock Exchange Ltd.,Rajasthan Chamber Bhawan, M.I. Road, Jaipur 302003

11Kanara Stock Exchange Ltd.,4th Floor, Rambhavan Complex, Kodialbail,


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Mangalore 575003

12The Ludhiana Stock Exchange Assn. Ltd.,Lajpat Rai Market, Clock Tower, Ludhiana 141

008

13Madras Stock Exchange Ltd.,Exchange Building, Post Box No 183, 11, Secondline Beach, Madras 600001

14Madhya Pradesh Exchange67, Bada Sarafa, Indore 452 002

15The Magadh Stock Exchange Ltd.,Bihar Industries Assn. Premises, Sinha Library

Road, Patna 800 001

16Pune Stock Exchange ltd.,PMT Commercial Building, Deccan Gymkhana,Pune 411 004

17Saurashtra Kutch Stock Exchange Ltd.,4, Swaminarayan, Gurukul Bldg, Dhebarbhai Rd,Rajkot 380 002

18T

he Uttar Pradesh Exchange Ass Ltd.,Padam Towers, 14/113, Civil Lines, Kanpur 208 001

19The Vadodara Stock Exchange ltd.,Paradise Complex, Opp. Commercial College,Tilak Rd, Sayajiganj, Baroda 390 005

20The Coimbatore Stock Exchange Ltd.,Avanashi Rd, Coimbatore

21The Meerut Stock Exchange Ltd.,

22OTC Exchange of India92, Maker Towers 'F', Cuffe Parade, Mumbai 400 005

23 National Stock Exchange


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Trade World, Kamala Mills Compound, LowerParel, Mumbai 400 013

Dr. Vijay PithadiaAssistant Professor & Kidevices Chair

School of Management StudiesShri Lauva Patel Trust College For Women

Amreli-365 601 GJ

Source: E-mail April 24, 2006

Past and Present of Indian capital market

Past and Present of Indian capital market

Introduction-

Indian Stock Markets are one of the oldest in Asia. Its history dates backto nearly 200 years ago. The earliest records of security dealings in Indiaare meager and obscure. The East India Company was the dominantinstitution in those days and business in its loan securities used to betransacted towards the close of the eighteenth century.


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By 1830's business on corporate stocks and shares in Bank and Cottonpresses took place in Bombay. Though the trading list was broader in

1839, there were only half a dozen brokers recognized by banks andmerchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise andbrokerage business attracted many men into the field and by 1860 thenumber of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply fromUnited States of Europe was stopped; thus, the 'Share Mania' in India

begun. The number of brokers increased to about 200 to 250. However,at the end of the American Civil War, in 1865, a disastrous slump began(for example, Bank of Bombay Share which had touched Rs 2850 couldonly be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out ofCivil War in 1874, found a place in a street (now appropriately called asDalal Street) where they would conveniently assemble and transact

business. In 1887, they formally established in Bombay, the "NativeShare and Stock Brokers' Association" (which is alternatively known as"The Stock Exchange "). In 1895, the Stock Exchange acquired a

premise in the same street and it was inaugurated in 1899. Thus, theStock Exchange at Bombay was consolidated.


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The Second World War broke out in 1939. It gave a sharp boom whichwas followed by a slump. But, in 1943, the situation changed radically,

when India was fully mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and othercommodities, those dealing in them found in the stock market as theonly outlet for their activities. They were anxious to join the trade andtheir number was swelled by numerous others. Many new associationswere constituted for the purpose and Stock Exchanges in all parts of the

country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur StockExchange Limited (1940) and Hyderabad Stock Exchange Limited(1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers'Association Limited and the st of the exchanges suffered almost a totaleclipse during depression. Lahore Exchange was closed during partitionof the country and later migrated to Delhi and merged with Delhi StockExchange.

Bangalore Stock Exchange Limited was registered in 1957 andrecognized in 1963.


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Most of the other exchanges languished till 1957 when they applied tothe Central Government for recognition under the Securities Contracts(Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad,Delhi, Hyderabad and Indore, the well established exchanges, were

recognized under the Act. Some of the members of the otherAssociations were required to be admitted by the recognized stockexchanges on a concessional basis, but acting on the principle of unitarycontrol, all these pseudo stock exchanges were refused recognition bythe Government of India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchangesin India (mentioned above). The number virtually remained unchanged,for nearly two decades. During eighties, however, many stock exchangeswere established: Cochin Stock Exchange (1980), Uttar Pradesh StockExchange Association Limited (at Kanpur, 1982), and Pune StockExchange Limited (1982), Ludhiana Stock Exchange AssociationLimited (1983), Gauhati Stock Exchange Limited (1984), Kanara StockExchange Limited (at Mangalore, 1985), Magadh Stock ExchangeAssociation (at Patna, 1986), Jaipur Stock Exchange Limited (1989),

Bhubaneswar Stock Exchange Association Limited (1989), SaurashtraKutch Stock Exchange Limited (at Rajkot, 1989), Vadodara StockExchange Limited (at Baroda, 1990) and recently established exchanges- Coimbatore and Meerut. Thus, at present, there are totally twenty onerecognized stock exchanges in India excluding the Over the CounterExchange of India Limited (OTCEI) and the National Stock Exchangeof India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indianstock markets since independence. It is quite evident from the Table thatIndian stock markets have not only grown just in number of exchanges,

but also in number of listed companies and in capital of listedcompanies. The remarkable growth after 1985 can be clearly seen from


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the Table, and this was due to the favouring government policiestowards security market industry.

Delhi Stocks and Shares Exchange Limited - were floated and later inJune 1947, amalgamated into the Delhi Stock Exchnage AssociationLimited.

National stock exchange-

With the liberalization of the Indian economy, it was found inevitable tolift the Indian stock market trading system on par with the internationalstandards. On the basis of the recommendations of high powered

Pherwani Committee, the National Stock Exchange was incorporated in1992 by Industrial Development Bank of India, Industrial Credit andInvestment Corporation of India, Industrial Finance Corporation ofIndia, all Insurance Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.


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Wholesale debt market operations are similar to money marketoperations - institutions and corporate bodies enter into high value

transactions in financial instruments such as government securities,treasury bills, public sector unit bonds, commercial paper, certificate ofdeposit, etc.

There are two kinds of players in NSE:

(a) Trading members and

(b) Participants.

Recognized members of NSE are called trading members who trade onbehalf of themselves and their clients. Participants include tradingmembers and large players like banks who take direct settlementresponsibility.

Trading at NSE takes place through a fully automated screen-basedtrading mechanism which adopts the principle of an order-driven

market. Trading members can stay at their offices and execute thetrading, since they are linked through a communication network. Theprices at which the buyer and seller are willing to transact will appear onthe screen. When the prices match the transaction will be completed anda confirmation slip will be printed at the office of the trading member.


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NSE has several advantages over the traditional trading exchanges. Theyare as follows:

* NSE brings an integrated stock market trading network across thenation.

* Investors can trade at the same price from anywhere in the countrysince inter-market operations are streamlined coupled with thecountrywide access to the securities.

* Delays in communication, late payments and the malpractice'sprevailing in the traditional trading mechanism can be done away withgreater operational efficiency and informational transparency in thestock market operations, with the support of total computerized network.

Unless stock markets provide professionalized service, small investorsand foreign investors will not be interested in capital market operations.And capital market being one of the major sources of long-term financefor industrial projects, India cannot afford to damage the capital market

path. In this regard NSE gains vital importance in the Indian capitalmarket system.

The origin of the stock market in India goes back to the end of theeighteenth century when long-term negotiable securities were firstissued. However, for all practical purposes, the real beginning occurredin the middle of the nineteenth century after the enactment of the


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companies Act in 1850, which introduced the features of limited liabilityand generated investor interest in corporate securities.

An important early event in the development of the stock market in Indiawas the formation of the native share and stock brokers 'Association atBombay in 1875, the precursor of the present day Bombay StockExchange. This was followed by the formation ofassociations/exchanges in Ahmedabad (1894), Calcutta (1908), andMadras (1937). In addition, a large number of ephemeral exchangesemerged mainly in buoyant periods to recede into oblivion duringdepressing times subsequently.

Stock exchanges are intricacy inter-woven in the fabric of a nation'seconomic life. Without a stock exchange, the saving of the community-the sinews of economic progress and productive efficiency- wouldremain underutilized. The task of mobilization and allocation of savingscould be attempted in the old days by a much less specialized institution

than the stock exchanges. But as business and industry expanded and theeconomy assumed more complex nature, the need for 'permanentfinance' arose. Entrepreneurs needed money for long term whereasinvestors demanded liquidity - the facility to convert their investmentinto cash at any given time. The answer was a ready market forinvestments and this was how the stock exchange came into being.

Stock exchange means any body of individuals, whether incorporated ornot, constituted for the purpose of regulating or controlling the businessof buying, selling or dealing in securities. These securities include:


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(i) Shares, scrip, stocks, bonds, debentures stock or other marketablesecurities of a like nature in or of any incorporated company or other

body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

The Bombay Stock Exchange (BSE) and the National Stock Exchangeof India Ltd (NSE) are the two primary exchanges in India. In addition,there are 22 Regional Stock Exchanges. However, the BSE and NSEhave established themselves as the two leading exchanges and accountfor about 80 per cent of the equity volume traded in India. The NSE andBSE are equal in size in terms of daily traded volume. The average dailyturnover at the exchanges has increased from Rs 851 crore in 1997-98 toRs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000

(April - August 1999). NSE has around 1500 shares listed with a totalmarket capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization ofaround Rs 9, 68,000 crore. Most key stocks are traded on both theexchanges and hence the investor could buy them on either exchange.Both exchanges have a different settlement cycle, which allows

investors to shift their positions on the bourses. The primary index ofBSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50Index (Nifty) which consists of fifty stocks. The BSE Sensex is the olderand more widely followed index.


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Both these indices are calculated on the basis of market capitalizationand contain the heavily traded shares from key sectors. The markets areclosed on Saturdays

And Sundays. Both the exchanges have switched over from the openoutcry trading system to a fully automated computerized mode oftrading known as BOLT (BSE on Line Trading) and NEAT (NationalExchange Automated Trading) System.

It facilitates more efficient processing, automatic order matching, fasterexecution of trades and transparency; the scrip's traded on the BSE have

been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' groupshares represent those, which are in the carry forward system (Badla).The 'F' group represents the debt market (fixed income securities)segment. The 'Z' group scrip's are the blacklisted companies. The 'C'group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rightsrenunciations. The key regulator governing Stock Exchanges, Brokers,

Depositories, Depository participants, Mutual Funds, FIIs and otherparticipants in Indian secondary and primary market is the Securities andExchange Board of India (SEBI) Ltd.

History of Indian stock exchange-

Do you know that the world's foremost marketplace New York StockExchange (NYSE), started its trading under a tree (now known as 68Wall Street) over 200 years ago? Similarly, India's premier stockexchange Bombay Stock Exchange (BSE) can also trace back its originto as far as 125 years when it started as a voluntary non-profit makingassociation.


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News on the stock market appears in different media every day. Youhear about it any time it reaches a new high or a new low, and you also

hear about it daily in statements like 'The BSE Sensitive Index rose 5%today'. Obviously, stocks and stock markets are important. Stocks of

public limited companies are bought and sold at a stock exchange. Butwhat really are stock exchanges? Known also as the stock market or

bourse, a stock exchange is an organized marketplace for securities (likestocks, bonds, options) featured by the centralization of supply anddemand for the transaction of orders by member brokers, for institutionaland individual investors.

The exchange makes buying and selling easy. For example, you don'thave to actually go to a stock exchange, say, BSE - you can contact a

broker, who does business with the BSE, and he or she will buy or sellyour stock on your behalf.

Indian venture capital market-

Market Basics Venture capital is very different from traditional sourcesof financing. Venture capitalists finance innovation and ideas, whichhave a potential for high growth but with inherent uncertainties. Thismakes it a high-risk, high-return investment. Apart from finance, venture

capitalists provide networking, management and marketing support aswell. In the broadest sense, therefore, venture capital connotes human aswell as financial capital. In the global venture capital industry, investorsand investee firms work together closely in an enabling environment thatallows entrepreneurs to focus on value creating ideas. Venturecapitalists, meanwhile, drive the industry through ownership of the


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levers of control in return for the provision of capital, skills, informationand complementary resources. This very blend of risk financing andhandholding of entrepreneurs by venture capitalists creates anenvironment particularly suitable for knowledge and technology-based

enterprises.

Scientific, technological and knowledge-based ideas - properlysupported by venture capital - can be propelled into a powerful engine ofeconomic growth and wealth creation in a sustainable manner. In variousdeveloped and developing economies, venture capital has played asignificant developmental role. India, along with Israel, Taiwan and theUS, is recognized for its globally competitive high technology andhuman capital. India's recent success story in software and IT is almost afairy tale when considering obstacles such as inadequate infrastructure,expensive hardware, restricted access to foreign skills and capital, andlimited domestic demand. It also indicates the potential India has interms of knowledge and technology-based industry.

India has the second largest English speaking scientific and technicalmanpower in the world. Some of its management (IIMs) and technologyinstitutes (IITs) are known globally as centers of excellence. Every year,over 115,000 engineers graduate from government-run and privateengineering colleges. Many also graduate with diploma courses incomputers and other technical areas. Management institutes produce40,000 management graduates annually. All of these candidates are

potential entrepreneurs.

It is also important to recognize that while India is doing very well in ITand software, it is still behind in terms of product and packageddevelopment. Many experts believe that just as the US did in the


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semiconductor industry in the eighties; it is time for India to move to ahigher level in the value chain.

This is not expected to happen automatically. The sequence of steps inthe high technology value chain is information, knowledge, ideas,innovation, product development and marketing. Basically, India is stillat the level of 'knowledge'. Given the limited infrastructure, low foreigninvestment and other transitional problems, it certainly needs policysupport to move to the third stage - i.e., ideas - and beyond, towardsinnovation and product development. This is crucial for sustainablegrowth and for maintaining India's competitive edge. This will takecapital and other support, which can be provided by venture capitalists.

India also has a vast pool of existing and on-going scientific andtechnical research carried out by a large number of research laboratories,including defence laboratories as well as universities and technicalinstitutes. A suitable venture capital environment - which includes

incubation facilities - can help a great deal in identifying and actualizingsome of this research into commercial production.

The development of a proper venture capital industry, particularly in theIndian context, is needed if high quality public offerings (IPO's) are to

be achieved. In the present situation, an individual investor becomes aventure capitalist of a sort by financing new enterprises and undertaking

unknown risks. Investors also get enticed into public offerings ofunproven and at times dubious quality. This situation can be corrected

by venture-backed successful enterprises accessing the capital market.This will also protect smaller investors.


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Venture capital is very different from traditional sources of financing.Venture capitalists finance innovation and ideas, which have a potentialfor high growth but with inherent uncertainties. This makes it a high-risk, high-return investment. Apart from finance, venture capitalists

provide networking, management and marketing support as well. In thebroadest sense, therefore, venture capital connotes human as well asfinancial capital. In the global venture capital industry, investors andinvested firms work together closely in an enabling environment thatallows entrepreneurs to focus on value creating ideas. Venturecapitalists, meanwhile, drive the industry through ownership of thelevers of control in return for the provision of capital, skills, informationand complementary resources. This very blend of risk financing and

handholding of entrepreneurs by venture capitalists creates anenvironment particularly suitable for knowledge and technology-basedenterprises.

Scientific, technological and knowledge-based ideas - properlysupported by venture capital - can be propelled into a powerful engine ofeconomic growth and wealth creation in a sustainable manner. In various

developed and developing economies, venture capital has played asignificant developmental role. India, along with Israel, Taiwan and theUS, is recognized for its globally competitive high technology andhuman capital. India's recent success story in software and IT is almost afairy tale when considering obstacles such as inadequate infrastructure,expensive hardware, restricted access to foreign skills and capital, andlimited domestic demand. It also indicates the potential India has interms of knowledge and technology-based industry.

India has the second largest English speaking scientific and technicalmanpower in the world. Some of its management (IIMs) and technologyinstitutes (IITs) are known globally as centers of excellence. Every year,over 115,000 engineers graduate from government-run and private


60/76

engineering colleges. Many also graduate with diploma courses incomputers and other technical areas. Management institutes produce40,000 management graduates annually. All of these candidates are

potential entrepreneurs.

It is also important to recognize that while India is doing very well in ITand software, it is still behind in terms of product and packageddevelopment. Many experts believe that just as the US did in thesemiconductor industry in the eighties; it is time for India to move to ahigher level in the value chain.

This is not expected to happen automatically. The sequence of steps inthe high technology valu

orgin and development of indian sensex

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