sm handout
TRANSCRIPT
-
8/2/2019 SM Handout
1/29
ECONOMICS NOTES
Concepts Related to Stock Market
Need to Raise Funds through Equity:
After the Industrial Revolution, as the size of the business enterprises grew, it was no longerpossible for proprietors or even partnerships to raise colossal amounts of money required for
undertaking large entrepreneurial ventures. Such huge requirement of capital could only be met by
the participation of a very large number of investors their numbers running into hundreds,thousands and even millions, depending upon the size of the business venture.
1. In general, small-time proprietors, partners of proprietary or partnership firm are likely to
find it rather difficult to get out of their business should they for some reason wish to do
so coz it is not always possible to find buyers for an entire business or even part of abusiness, just when one wishes to sell it.
2. It is not easy for someone with savings, especially with a small amount of savings, to
readily find an appropriate business opportunity, for investment.
3. These problems are further magnified in larger proprietorships and partnerships investments would not be easily forthcoming since their savings would be very difficult
to convert into cash (for better investment opportunity, marriage, education, death, healthetc.)
Advantages of Equity Financing:1. Permanent capital: since ordinary shares are not redeemable (capital received on the issue
of shares can be redeemed/paid back on the winding up of the company only), the
company has no liability for cash outflow associated with its redemption. It is a
permanent capital and is available for use as long as the company goes on.2. Borrowing base: it increases the companys financial base, and thus its borrowing limit.
Lenders generally lend in proportion to the companys equity capital. By issuing ordinaryshares, the company increases its financial capability. It can borrow when it needsadditional funds.
3. Dividend payment discretion: a company is not legally obliged to pay dividend. In times
of financial difficulties, it can reduce or suspend payment of dividend. In practicedividend cuts are not very common and frequent. A company tries to pay dividend
regularly. It cuts dividend only when it cannot manage cash to pay dividends.
Stocks and securities:They are generic terms that stand for instruments of ownership like shares, as well as instruments
of lending like debentures, which are issued publicly. Just as a share represents the smallest unit
of ownership, a debenture or a bond represents the smallest unit of lending.
Share:
A share represents the smallest recognized fraction of ownership in a publicly held business.Each such fraction of ownership is represented in the form of a certificate, known as the share
certificate.
-
8/2/2019 SM Handout
2/29
Share at Par: Par value implies the value at which a share is originally recorded in the balance
sheet as equity capital.
Share at Premium: A new company set up by an existing company (and of course existing
companies themselves) with a track record of at least five years of consistent profitability are
allowed by the SEBI guidelines to issue shares at a premium (being the excess of subscriptionprice over par value).
Share Certificate: is a document of title issued by the company declaring that the person namedtherein is the owner of a specified number of shares in the capital of the company. It is just a
prima facie evidence of the title to a share or shares represented by the certificate.
Share Warrant: is an option to buy a specified number of a firms shares at a specified priceover a specified period of time. Warrants are issued by companies for cash to investors who may
exercise the inherent option (to buy the share) or may resell the warrants to other investors.
Typically, the warrant-holder has to surrender the warrant and pay some additional cash, known
as the exercise price of the warrant, in order to buy the shares. In general, warrants expire by agiven date. Once the option on the warrant has been exercised, the warrant-holder becomes a
shareholder.
Debenture:
It represents the smallest unit of public lending to a company. The debenture holder assumesvery little risk on his investment they are persons who have advanced loans to the company
and are creditors and not members of the company. A debenture holder receives a fixed stream of
interest. Payment of such interest is a legal obligation on the part of the company.
Share Debenture
1. Share is a part of the capital of thecompany Debentures constitute a loan.
2. Shareholders are the owners of the
company
Debenture-holders are creditors.
3. Shareholders enjoy voting rights. Debenture-holders do not have voting
rights.
4. Dividends can be paid to shareholdersonly out of the profits of the company.
Interest on debentures has to paid, even ifthere are no profits.
Shares and debentures may be of various kinds:
Ordinary share: represents the form of fractional ownership in which a shareholder, as afractional owner, undertakes maximum entrepreneurial risk associated with a business venture:
1. During the life of the business, he receives dividends out of operating surplus, the
residual from the revenue, after subtracting all the operating expenses, the interest charges on
all kinds of borrowings, various taxes, and dividends due to non-ordinary shareholders there may or may not be adequate surplus left for ordinary shareholders.
-
8/2/2019 SM Handout
3/29
2. When the business is on the verge of closure, all other stakeholders, such as employees,
creditors, lenders, government, preference shareholders, etc, must be paid their claims first
and only the residual can be shared by the ordinary shareholders.Thus, both during the life and death of a business, the ordinary shareholders are the last to
receive their claims they are exposed to the highest risk amongst all the stakeholders in a
business.3. In view of the entrepreneurial risk assumed by them, ordinary shareholders have voting
rights in proportion to the number of shares held by them. The vote is usually exercised by
them on resolutions placed before the company, in their Annual General Meeting orExtraordinary General Meetings.
Preference Shares:
Preference share capital means that part of the share capital, which fulfils the following criteria:(a) Dividend it carries or will carry a preferential right to be paid a fixed amount or an
amount calculated at a fixed rate.
(b) Capital it carries or will carry, on the winding up or repayment of capital, a preferential
right to be repaid the amount of the capital paid up or deemed to be paid up.
Equity:Ownershipinterestin acorporation in the form ofcommon stockorpreferred stock. It is the risk-
bearing part of the company's capital and contrasts with debt capital which is usually secured and
has priority over shareholders if the company becomes insolvent and its assets are distributed.
Sweat equity
Equity acquired by a company's executives on favorable terms, to reflect the value the executives
have added and will continue to add to the company.
Gilt-edged stock(gilts)
Gilts are fixed income or index-linked bonds issued by the Government.
When you buy gilt, you are lending the government money in return for regular interestpayments and the promise that the nominal value of the gilt will be repaid (redeemed) on a
specified later date. The rate of interest will be in the name of the gilt (e.g. 8% Treasury 2021 is a
gilt issued by the Treasury which pays 8% interest p.a. and is repayable in 2021)
SOME IMPORTANT TERMS RELATED TO CAPITAL MARKET
Company:
In legal terms it means the company incorporated, formed and registered under the Companies
Act, 1956 and includes its subsidiary company incorporated in a country outside India.
Nominal / Authorised / Registered Capital:
http://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/1140/corporation.htmlhttp://www.investorwords.com/1140/corporation.htmlhttp://www.investorwords.com/986/common_stock.htmlhttp://www.investorwords.com/986/common_stock.htmlhttp://www.investorwords.com/3778/preferred_stock.htmlhttp://www.investorwords.com/273/assets.htmlhttp://www.investorwords.com/1140/corporation.htmlhttp://www.investorwords.com/986/common_stock.htmlhttp://www.investorwords.com/3778/preferred_stock.htmlhttp://www.investorwords.com/273/assets.htmlhttp://www.investorwords.com/2531/interest.html -
8/2/2019 SM Handout
4/29
A maximum amount that the company is authorized to raise by issuing shares. It is usually fixed
as the amount which, it is estimated, the company will need, including the working capital and
reserve capital, if any.
Issued Capital: It is that part of the authorized capital, which is offered by the company for
subscription and includes shares allotted for consideration other than cash.
Subscribed Capital: It is the nominal amount of shares taken up by the public.
Called-up Capital: It is the total amount called up on the shares issued.
Paid-up Capital: Is the total amount paid or credited as paid up on shares issued. It is equal to
the called-up capital less calls in arrears.
Reserve Capital:
This is that part of the uncalled capital of the company, which can be called up only in the event
of its winding up. A limited company, by a special resolution, determines that a portion of itsuncalled capital shall be called-up
In the event of winding up
For the purpose of winding up
Stock Market
Stock Market is a market where the trading of company stock, both listed securities and unlistedtakes place. It is different from stock exchange because it includes all the national stock
exchanges of the country. For example, we use the term, "the stock market was up today" or "the
stock market bubble."
Stock Exchanges In India
Bombay Stock Exchange
National Stock Exchange
Regional Stock Exchanges
Ahmedabad, Bangalore, Bhubaneshwar, Calcutta, Cochin, Coimbatore, Delhi,
Guwahati, Hyderabad, Jaipur, Ludhiana, Madhya Pradesh, Madras Stock Exchange,Magadh Stock Exchange,Mangalore Stock Exchange,Meerut Stock Exchange,OTC
Exchange of India, Pune Stock Exchange, Saurashtra Kutch Stock Exchange, Uttar
Pradesh Stock Exchange,Vadodara Stock Exchange
Stock exchanges also facilitate the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is central buttrade is linked to such physical place because modern markets are computerised. The trade on an
exchange is only by members and a stockbroker does have a seat on the exchange.
History of Indian Stock Market: Indian stock market is one of the oldest stock markets in Asia.
It dates back to the close of 18th century when the East India Company used to transact loansecurities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took
http://www.surfindia.com/finance/bombay-stock-exchange.htmlhttp://www.surfindia.com/finance/national-stock-exchange.htmlhttp://www.surfindia.com/finance/regional-stock-exchanges.htmlhttp://www.surfindia.com/finance/ahmedabad-stock-exchange.htmlhttp://www.surfindia.com/finance/bangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/bhubaneshwar-stock-exchange.htmlhttp://www.surfindia.com/finance/calcutta-stock-exchange.htmlhttp://www.surfindia.com/finance/cochin-stock-exchange.htmlhttp://www.surfindia.com/finance/coimbatore-stock-exchange.htmlhttp://www.surfindia.com/finance/delhi-stock-exchange.htmlhttp://www.surfindia.com/finance/delhi-stock-exchange.htmlhttp://www.surfindia.com/finance/guwahati-stock-exchange.htmlhttp://www.surfindia.com/finance/hyderabad-stock-exchange.htmlhttp://www.surfindia.com/finance/jaipur-stock-exchange.htmlhttp://www.surfindia.com/finance/ludhiana-stock-exchange.htmlhttp://www.surfindia.com/finance/madhya-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/madras-stock-exchange.htmlhttp://www.surfindia.com/finance/magadh-stock-exchange.htmlhttp://www.surfindia.com/finance/magadh-stock-exchange.htmlhttp://www.surfindia.com/finance/mangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/mangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/meerut-stock-exchange.htmlhttp://www.surfindia.com/finance/meerut-stock-exchange.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/pune-stock-exchange.htmlhttp://www.surfindia.com/finance/pune-stock-exchange.htmlhttp://www.surfindia.com/finance/kutch-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/vadodara-stock-exchange.htmlhttp://www.surfindia.com/finance/bombay-stock-exchange.htmlhttp://www.surfindia.com/finance/national-stock-exchange.htmlhttp://www.surfindia.com/finance/regional-stock-exchanges.htmlhttp://www.surfindia.com/finance/ahmedabad-stock-exchange.htmlhttp://www.surfindia.com/finance/bangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/bhubaneshwar-stock-exchange.htmlhttp://www.surfindia.com/finance/calcutta-stock-exchange.htmlhttp://www.surfindia.com/finance/cochin-stock-exchange.htmlhttp://www.surfindia.com/finance/coimbatore-stock-exchange.htmlhttp://www.surfindia.com/finance/delhi-stock-exchange.htmlhttp://www.surfindia.com/finance/guwahati-stock-exchange.htmlhttp://www.surfindia.com/finance/hyderabad-stock-exchange.htmlhttp://www.surfindia.com/finance/jaipur-stock-exchange.htmlhttp://www.surfindia.com/finance/ludhiana-stock-exchange.htmlhttp://www.surfindia.com/finance/madhya-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/madras-stock-exchange.htmlhttp://www.surfindia.com/finance/magadh-stock-exchange.htmlhttp://www.surfindia.com/finance/mangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/meerut-stock-exchange.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/pune-stock-exchange.htmlhttp://www.surfindia.com/finance/kutch-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/vadodara-stock-exchange.html -
8/2/2019 SM Handout
5/29
place in Bombay. Though the trading was broad but the brokers were hardly half dozen during
1840 and 1850.
In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India began when
the American Civil War broke out and the cotton supply from the US to Europe stopped. Further
the brokers increased to 250.
At the end of the war in 1874, the market found a place in a street (now called Dalal Street). In
1887, "Native Share and Stock Brokers' Association" was established. In 1895, the exchangeacquired premises in the street, which was inaugurated in 1899.
1830s -trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay.
Though the trading was broad but the brokers were hardly half dozen during 1840and 1850.
1860 - The exchange flourished with 60 brokers. In fact, the 'Share Mania' in India began with
the American Civil War broke and the cotton supply from the US to Europe stopped.
Further the brokers increased to 250.1874 - At the end of the war in 1874, the market found a place in a street (now called Dalal
Street).1887 - "Native Share and Stock Brokers' Association" was established.
1895 - The exchange acquired a premise in the street which was inaugurated in 1899.
Stock Exchange: The institution where the buying and selling of stocks, shares and long-term
commitments takes place.
A Stock Exchange in India operates with due recognition from the government under the
Securities and Contracts (Regulations) Act, 1956.
Primary market is where the company makes its first contact with the public at large in search
of capital. Therefore, if one is wondering whether or not to invest in the new issue of a company,
one is contemplating whether or not to participate in the primary market.
Secondary market: Having subscribed to the share or debenture of a company, if one wishes to
sell the same, it will be done in the secondary market. Similarly, one could also buy the share or
debenture of a company from the secondary market (if the company is listed in the stockexchange), without having to wait for that company to come out with a new public issue.
Evidently, by their very role, stock exchanges are an important constituent of the capital market.
Member brokers are essentially middlemen, who carry out the desired transactions in securities
on behalf of the public (for a commission) or on their own behalf.
Jobber: a jobber is a brokers broker or one who specializes in specific securities catering to the
needs of other brokers.
Role of SEBI:
-
8/2/2019 SM Handout
6/29
SEBI (Securities and Exchange Board of India) is the national regulatory body for the securities
market. It was set up under the Securities and Exchange Board of India Act, 1992 to protect theinterests of investors in securities and to promote the development of, and to regulate, the
securities market and for matters connected therewith or incidental to.
Powers and functions include:
1. regulation of stock exchanges and other securities markets
2. registration and regulation of the working of stock brokers, sub brokers, bankers to anissue (a public offer of capital), trustees of trust deeds, registrars to an issue, merchant
bankers, portfolio managers, etc.
3. registration and regulation of mutual funds
4. promotion and regulation of self-regulatory organizations5. prohibiting fraudulent and unfair trade practices and insider trading in securities markets
6. regulating substantial acquisition of shares and takeover of companies
7. levying various fees and other charges
8. conducting research for the above purposes and performing such other functions as maybe prescribed from time to time.
Prospectus: it is a document that must accompany the applications forms of all public issues of
securities, whether ordinary shares, preference shares or debentures. Typically, it contains the
terms and conditions of the issue, along with the specific features of the security, the purpose forwhich the issue is being made, the companys track record, the risks inherent in the project for
which the capital is being raised and so on.
Underwriting
Making public issue of securities is risky. There is always a chance that the issue may not be
fully subscribed, though this chance may be high or low depending upon
1. the size of the issue2. the track record of the company/promoters making the issue
3. the nature of the project for which the issue is being made
4. the general economic conditions, etc.
Underwriters are professionals buying other peoples worry for a commission. They undertake to
buy (underwrite) the stock under issue to the extent they are not subscribed to fully by the
public.
In other words, underwriters, who may be large brokers, merchant bankers or banks, are insurers
who insure stocks against non-subscription.
Bulls: those who buy shares in anticipation of an increase in prices so that they can sell later at ahigher price.
Bears: those who sell shares anticipating a fall in prices.
Stags: those who in general do not invest in the secondary market. They prefer to make
investments in the primary market when new issues are made.
-
8/2/2019 SM Handout
7/29
Bull Market: a rising market with abundance of buyer and few sellers.
Bear Market: a weak or falling market attracting the sellers or the bears.
Blue Chips: are shares of large, well established and financially sound companies with an
impressive record of earnings and dividends. The price volatility of such shares is moderate.
Net Worth: is the wealth of the shareholders at book value. It is the difference between total
assets (excluding intangible assets and accumulated losses and expenditures) and total liabilities.
Equity/Net worth = Share Capital + reserves
(Reserves refer to that part of the surplus generated during operations, which is retained by thecompany or not distributed to its shareholders).
Bonus Issue: Over a period of time the retained earnings of a firm can become quite large, often
several times the original share capital. The management of the firm may then, decide to transfersome amount from the reserves account to the share capital account by a mere book entry. This is
termed as a Bonus Issue.
Rights Issue: Sometimes, a company may desire to expand its activities or it may require more
financial resources even in the absence of expansion activities. In such a situation, it may issue apart or whole of its un-issued share capital. Whenever an existing company makes a fresh issue
of equity capital or convertible debentures, the existing shareholders or convertible debenture-
holders have the first right to subscribe to the issue in proportion to their existing holdings. Only
what is not subscribed to by the existing shareholders can be issued to the public. Thus, an issueoffered to the existing shareholders or convertible debenture-holders as their right is known as
rights issue, as opposed to an issue open to public at large, in which case it is called a public
issue.
DEMAT SHARES OR PAPERLESS TRADING
Although India had a vibrant capital market which is more than a century old, the paper based
settlement of trades caused substantial problems like bad delivery and delayed transfer of title till
recently. The enactment ofDepositories Act in August 1996 paved the way for establishment ofNSDL, the first depository in India. The concept is brought in by National SecuritiesDepository Limited (NSDL), an organization promoted by UTI, NSE, IDBI and SBI.
Depository is an organization where the securities of a shareholder are held in an electronic
format at the request of the shareholder.
A depository can be compared to a bank. If an investor wants to utilize the services offered by a
depository, the investor has to open an account with the depository through a participant. This is
similar to opening of an account with any of the branches of a bank in order to utilize the
services of the bank.
-
8/2/2019 SM Handout
8/29
Dematerialization: is a process by which an investor gets physical certificates converted into
electronic balances maintained in his account with the Participant in the depository system.The certificates are forwarded to the Registrar and the Registrar after processing them gives an
equivalent credit in the investors account.
The investor can dematerialize only those securities that are already registered in his name.Those shares that are pledged with the bank can also be dematerialized with the permission of
the bank.
Rematerialization: dematerialization can be reversed, i.e. even after converting physical shares
into electronic shares investor can get back the physical shares by reconverting them.
The investor has the option of rematerializing his total holdings or part of it.
STOCK EXCHANGES IN INDIA
Bombay Stock Exchange
National Stock Exchange
Regional Stock Exchanges
Ahmedabad Stock Exchange
Bangalore Stock Exchange
Bhubaneshwar Stock Exchange
Calcutta Stock Exchange
Cochin Stock Exchange
Coimbatore Stock Exchange
Delhi Stock Exchange
Guwahati Stock Exchange
Hyderabad Stock Exchange
Jaipur, Ludhiana Stock Exchange
Madhya Pradesh Stock Exchange
Madras Stock Exchange,
Magadh Stock Exchange,
Mangalore Stock Exchange,
Meerut Stock Exchange,
OTC Exchange of India,
Pune Stock Exchange,
Saurashtra Kutch Stock Exchange,
Uttar Pradesh Stock Exchange,
Vadodara Stock Exchange.
Indian Stock Market Growth
http://www.surfindia.com/finance/bombay-stock-exchange.htmlhttp://www.surfindia.com/finance/national-stock-exchange.htmlhttp://www.surfindia.com/finance/regional-stock-exchanges.htmlhttp://www.surfindia.com/finance/ahmedabad-stock-exchange.htmlhttp://www.surfindia.com/finance/bangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/bhubaneshwar-stock-exchange.htmlhttp://www.surfindia.com/finance/calcutta-stock-exchange.htmlhttp://www.surfindia.com/finance/cochin-stock-exchange.htmlhttp://www.surfindia.com/finance/coimbatore-stock-exchange.htmlhttp://www.surfindia.com/finance/delhi-stock-exchange.htmlhttp://www.surfindia.com/finance/guwahati-stock-exchange.htmlhttp://www.surfindia.com/finance/hyderabad-stock-exchange.htmlhttp://www.surfindia.com/finance/jaipur-stock-exchange.htmlhttp://www.surfindia.com/finance/ludhiana-stock-exchange.htmlhttp://www.surfindia.com/finance/madhya-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/madras-stock-exchange.htmlhttp://www.surfindia.com/finance/magadh-stock-exchange.htmlhttp://www.surfindia.com/finance/mangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/meerut-stock-exchange.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/pune-stock-exchange.htmlhttp://www.surfindia.com/finance/kutch-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/vadodara-stock-exchange.htmlhttp://www.surfindia.com/finance/bombay-stock-exchange.htmlhttp://www.surfindia.com/finance/national-stock-exchange.htmlhttp://www.surfindia.com/finance/regional-stock-exchanges.htmlhttp://www.surfindia.com/finance/ahmedabad-stock-exchange.htmlhttp://www.surfindia.com/finance/bangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/bhubaneshwar-stock-exchange.htmlhttp://www.surfindia.com/finance/calcutta-stock-exchange.htmlhttp://www.surfindia.com/finance/cochin-stock-exchange.htmlhttp://www.surfindia.com/finance/coimbatore-stock-exchange.htmlhttp://www.surfindia.com/finance/delhi-stock-exchange.htmlhttp://www.surfindia.com/finance/guwahati-stock-exchange.htmlhttp://www.surfindia.com/finance/hyderabad-stock-exchange.htmlhttp://www.surfindia.com/finance/jaipur-stock-exchange.htmlhttp://www.surfindia.com/finance/ludhiana-stock-exchange.htmlhttp://www.surfindia.com/finance/madhya-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/madras-stock-exchange.htmlhttp://www.surfindia.com/finance/magadh-stock-exchange.htmlhttp://www.surfindia.com/finance/mangalore-stock-exchange.htmlhttp://www.surfindia.com/finance/meerut-stock-exchange.htmlhttp://www.surfindia.com/finance/otc-exchange-india.htmlhttp://www.surfindia.com/finance/pune-stock-exchange.htmlhttp://www.surfindia.com/finance/kutch-stock-exchange.htmlhttp://www.surfindia.com/finance/uttar-pradesh-stock-exchange.htmlhttp://www.surfindia.com/finance/vadodara-stock-exchange.html -
8/2/2019 SM Handout
9/29
PARTICULARS 1946 1961 1971 1975 1980 1985 1991 1995
No. of Stock Exchanges 7 7 8 8 9 14 20 22
No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593
No. of Stock Issues of
Listed Cos.
1506 2111 2838 3230 3697 6174 8967 11784
Capital of Listed Cos.
(Cr. Rs.)
270 753 1812 2614 3973 9723 32041 59583
Market value of Capital
of Listed Cos. (Cr. Rs.)
971 1292 2675 3273 6750 25302 110279 478121
Capital per Listed Cos.
(4/2) (Lakh Rs.)
24 63 113 168 175 224 514 693
Market Value of Capital
per Listed Cos. (Lakh
Rs.) (5/2)
86 107 167 211 298 582 1770 5564
Appreciated value of
Capital per Listed Cos.(Lakh Rs.)
358 170 148 126 170 260 344 803
LISTING OF SECURITIES
Listing means admission of the securities to dealings on a recognised stock exchange. The
securities may be of any public limited company, Central or State Government, quasi-
governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
provide liquidity to securities;
mobilize savings for economic development; protect interest of investors by ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing of securities ofcompanies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956,
Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI
and Rules, Bye-laws and Regulations of the Exchange.
A company intending to have its securities listed on the Exchange has to comply with the listing
requirements prescribed by the Exchange. Some of the requirements are as under:
[I] Minimum Listing Requirements for new companies(A) Minimum Capital :
1. New companies can be listed on the Exchange, if their issued & subscribed equity capitalafter the public issue is Rs.10 crores . In addition to this the issuer company should have
a post issue networth ( equity capital + free reserves excluding revaluation reserve) of
Rs.20 crores.
-
8/2/2019 SM Handout
10/29
2. For new companies in high technology ( i.e. information technology, internet, e-
commerce, telecommunication, media including advertisement, entertainment etc.) the
following criteria will be applicable regarding threshold limit:i. The total income/sales from the main activity, which should be in the field of
information technology, internet, e-commerce, telecommunication, media
including advertisement, entertainment etc. should not be less than 75% of thetotal income during the two immediately preceding years as certified by the
Auditors of the company.
ii. The minimum post-issue paid-up equity capital should be Rs.5 Crores.iii. The minimum market capitalisation should be Rs.50 Crores. (The capitalisation
will be calculated by multiplying the post issue subscribed number of equity
shares with the Issue price).
iv. Post issue networth ( equity capital + free reserves excluding revaluation reserve)of Rs.20 Crores.
(B) Minimum Public offer :
As per Rule 19(2) (b) of the Securities Contracts (Regulation) Rules, 1957, securities of acompany can be listed on a Stock Exchange only when at least 25% of each class or kind of
securities is offered to the public for subscription.In case of IPOs by unlisted companies in the IT& entertainment sector, at least 10% of the
securities issued by the company may be offered to the public subject to the following:
Minimum 20 lac securities are offered to the public (excluding reservation, firmallotment and promoters contribution)
The size of the offer to the public is minimum 50 crores.
For this purpose, the term "offered to the public" means only the portion offered to the public
and does not include reservations of securities on firm or competitive basis.SEBI may, however, relax this condition on the basis of recommendations of stock exchange(s),
only in respect of a Government company defined under Section 617 of the Companies Act,
1956.
[II] Minimum Listing Requirements for companies listed on other stock exchanges
The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended thedirect listing norms for companies listed on other Stock Exchange(s) and seeking listing at BSE.
These norms are applicable with immediate effect.
1. The company should have minimum issued and paid up equity capital of Rs. 3 crores.
2. The Company should have profit making track record for last three years. Therevenues/profits arising out of extra ordinary items or income from any source of non-
recurring nature should be excluded while calculating distributable profits.
3. Minimum networth of Rs. 20 crores (networth includes Equity capital and free reservesexcluding revaluation reserves).
4. Minimum market capitalisation of the listed capital should be at least two times of the
paid up capital.5. The company should have a dividend paying track record for the last 3 consecutive years
and the minimum dividend should be at least 10%.
6. Minimum 25% of the company's issued capital should be with Non-Promoters
shareholders as per Clause 35 of the Listing Agreement. Out of above Non Promoter
-
8/2/2019 SM Handout
11/29
holding no single shareholder should hold more than 0.5% of the paid-up capital of the
company individually or jointly with others except in case of Banks/Financial
Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-ResidentIndians.
7. The company should have at least two years listing record with any of the Regional Stock
Exchange.8. The company should sign an agreement with CDSL & NSDL for demat trading.
[III] Minimum Requirements for companies delisted by this Exchange seeking relisting of
this Exchange
The companies delisted by this Exchange and seeking relisting are required to make a fresh
public offer and comply with the prevailing SEBI's and BSE's guidelines regarding initial public
offerings.
[IV] Permission to use the name of the Exchange in an Issuer Company's prospectus
The Exchange follows a procedure in terms of which companies desiring to list their securities
offered through public issues are required to obtain its prior permission to use the name of theExchange in their prospectus or offer for sale documents before filing the same with the
concerned office of the Registrar of Companies. The Exchange has since last three years formeda "Listing Committee" to analyse draft prospectus/offer documents of the companies in respect
of their forthcoming public issues of securities and decide upon the matter of granting them
permission to use the name of "Bombay Stock Exchange Limited" in their prospectus/offerdocuments. The committee evaluates the promoters, company, project and several other factors
before taking decision in this regard.
[V] Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on theExchange is required to submit a Letter of Application to all the Stock Exchanges where it
proposes to have its securities listed before filing the prospectus with the Registrar of
Companies.
[VI] Allotment of Securities
As per Listing Agreement, a company is required to complete allotment of securities offered to
the public within 30 days of the date of closure of the subscription list and approach the RegionalStock Exchange, i.e. Stock Exchange nearest to its Registered Office for approval of the basis of
allotment.
In case of Book Building issue, Allotment shall be made not later than 15 days from the closureof the issue failing which interest at the rate of 15% shall be paid to the investors.
[VII] Trading Permission
As per Securities and Exchange Board of India Guidelines, the issuer company should complete
the formalities for trading at all the Stock Exchanges where the securities are to be listed within 7
working days of finalisation of Basis of Allotment.
-
8/2/2019 SM Handout
12/29
A company should scrupulously adhere to the time limit for allotment of all securities and
dispatch of Allotment Letters/Share Certificates and Refund Orders and for obtaining the listing
permissions of all the Exchanges whose names are stated in its prospectus or offer documents. Inthe event of listing permission to a company being denied by any Stock Exchange where it had
applied for listing of its securities, it cannot proceed with the allotment of shares. However, the
company may file an appeal before the Securities and Exchange Board of India under Section 22of the Securities Contracts (Regulation) Act, 1956.
[VIII] Requirement of 1% Security
The companies making public/rights issues are required to deposit 1% of issue amount with the
Regional Stock Exchange before the issue opens. This amount is liable to be forfeited in the
event of the company not resolving the complaints of investors regarding delay in sending refund
orders/share certificates, non-payment of commission to underwriters, brokers, etc.
[IX] Payment of Listing Fees
All companies listed on the Exchange have to pay Annual Listing Fees by the 30th April of every
financial year to the Exchange as per the Schedule of Listing Fees prescribed from time to time.The schedule of listing fees for the year 2004-2005, prescribed by the Governing Board of the
Exchange and approved by the Securities and Exchange Board of India is given hereunder :
SCHEDULE OF LISTING FEES FOR THE YEAR 2005-2006
Sr.
No.
Particulars Amount (R
1 Initial Listing Fees 20,000
2
Annual Listing Fees:
(i) Companies with paid-up capital* upto Rs. 5 crores(ii) Above Rs. 5 crores and upto Rs. 10 crores
(iii) Above Rs. 10 crores and upto Rs. 20 crores
10,000
15,000
30,000
3 Companies which have a paid-up capital* of more than Rs. 20 crores will pay additional fee of
750/- for every increase of Rs. 1 crores or part thereof.
4 In case of debenture capital (not convertible into equity shares) of companies, the fees will be char@ 25% of the fees payable as per the above mentioned scales.
*includes equity shares, preference shares, fully convertible debentures, partly convertible
debenture capital and any other security which will be converted into equity shares.
[X] Compliance with Listing Agreement
-
8/2/2019 SM Handout
13/29
The companies desirous of getting their securities listed are required to enter into an agreement
with the Exchange called the Listing Agreement and they are required to make certain
disclosures and perform certain acts. As such, the agreement is of great importance and isexecuted under the common seal of a company. Under the Listing Agreement, a company
undertakes, amongst other things, to provide facilities for prompt transfer, registration, sub-
division and consolidation of securities; to give proper notice of closure of transfer books andrecord dates, to forward copies of unabridged Annual Reports and Balance Sheets to the
shareholders, to file Distribution Schedule with the Exchange annually; to furnish financial
results on a quarterly basis; intimate promptly to the Exchange the happenings which are likelyto materially affect the financial performance of the Company and its stock prices, to comply
with the conditions of Corporate Governance, etc.
The Listing Department of the Exchange monitors the compliance of the companies with the
provisions of the Listing Agreement, especially with regard to timely payment of annual listingfees, submission of quarterly results, requirement of minimum number of shareholders, etc. and
takes penal action against the defaulting companies.
[XI] "Z" GroupThe Exchange has introduced a new category called "Z Group" from July 1999 for companies
who have not complied with and are in breach of provisions of the Listing Agreement. Thenumber of companies placed under this group as at the end of May, 2001 was 1,475.
The number of companies listed at the Exchange as at the end of May 2001 was 5,874. This is
the highest number among the Stock Exchanges in the country and in the world.
New Direct Listing norms
The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended the
direct listing norms for companies listed on other Stock Exchange(s) and seeking listing at BSE.These norms are applicable with immediate effect.
1. The company should have minimum issued and paid up equity capital of Rs. 3 crores.
2. The Company should have profit making track record for last three years. Therevenues/profits arising out of extra ordinary items or income from any source of non-
recurring nature should be excluded while calculating distributable profits.
3. Minimum networth of Rs. 20 crores (networth includes Equity capital and free reservesexcluding revaluation reserves).
4. Minimum market capitalisation of the listed capital should be at least two times of the
paid up capital.
5. The company should have a dividend paying track record for the last 3 consecutive yearsand the minimum dividend should be at least 10%.
6. Minimum 25% of the company's issued capital should be with Non-Promoters
shareholders as per Clause 35 of the Listing Agreement. Out of above Non Promoterholding no single shareholder should hold more than 0.5% of the paid-up capital of the
company individually or jointly with others except in case of Banks/Financial
Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-ResidentIndians.
7. The company should have at least two years listing record with any of the Regional Stock
Exchange.
8. The company should sign an agreement with CDSL & NSDL for demat trading.
-
8/2/2019 SM Handout
14/29
[XII] Cash Management Services (CMS) - Collection of Listing Fees
As a further step towards simplifying the system of payment of listing fees, the Exchange hasentered into an arrangement with HDFC Bank for collection of listing fees, from 141 locations,
situated all over India.Details of the HDFC Bank branches, are available on our website site
www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com The abovefacility is being provided free of cost to the Companies.
Companies intending to utilise the above facility for payment of listing fee would be required tofurnish the information, (mentioned below) in the Cash Management Cash Deposit Slip. These
slips would be available at all the HDFC Bank centres.
S.No HEAD INFORMATION TO BE PROVIDED
1.Client
NameBombay Stock Exchange Limited
2.
Client
Code BSELIST
3.Cheque
No.mention the cheque No & date
4. Date date on which payment is being deposited with the bank.
5. Drawer
state the name of the company and the company code No.The last
digits mentioned in the Ref. No. on the Bill is the company code No.e.g
If the Ref. No in the Bill is mentioned as : Listing/Alf-Bill/2004-
2005/4488, then the code No of that company is 4488
6.Drawee
Bankstate the bank on which cheque is drawn
7. Drawn onLocation
Mention the location of the drawee bank.
8.Pickup
LocationNot applicable
9. No. of Insts Not applicable
The Cheque should be drawn in favour of Bombay Stock Exchange Limited , and should bepayable, locally. Companies are requested to mention in the deposit slip, the financial year(s) for
which listing fee is being paid. Payment made through any other slips would not be considered.
The above slips will have to be filled in quadruplicate. One acknowledged copy would be
provided to the depositor by the HDFC Bank.
===============================================
SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS
1875 - 318 members by paying a princely amount of Re. 1.
http://www.bseindia.com/http://www.hdfcbank.com/http://www.hdfcbank.com/http://www.bseindia.com/http://www.hdfcbank.com/ -
8/2/2019 SM Handout
15/29
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.
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 basevalue is 100.
The Index was initially calculated based on the "Full Market Capitalization" methodology butwas 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.
SENSEX Calculation Methodology
SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per thismethodology, 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 isdetermined 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, atwhich 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. (For more details click Dollex series of BSE indices)
Understanding Free-float Methodology
Concept:
Free-float Methodology refers to an index construction methodology that takes into considerationonly 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-
http://www.bseindia.com/about/abindices/dollex1.asphttp://www.bseindia.com/about/abindices/dollex1.asp -
8/2/2019 SM Handout
16/29
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 TECk in July 2001 and
BANKEX in June 2003. While BSE TECk Index is a TMT benchmark, BANKEX is positionedas 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 concentrationof 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 managersby enabling them to benchmark their fund returns vis--vis an investable index. This
enables an apple-to-apple comparison thereby facilitating better evaluation ofperformance of active managers. Being a perfectly replicable portfolio of stocks, a Free-
float adjusted index is best suited for the passive managers as it enables them to track the
index with the least tracking error.
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 Indexbecause 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 toinclude 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 anindustry 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-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. Inspecific, 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"
-
8/2/2019 SM Handout
17/29
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 normalcourse.
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. (Format available on www.bseindia.com) The Exchange
determines the Free-float factor for each company based on the detailed information submittedby 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 say0.55 means that only 55% of the market capitalization of the company will be considered for
index calculation.
Index Closure Algorithm
The closing SENSEX on any trading day is computed taking the weighted average of all thetrades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX
constituent has not traded in the last 30 minutes, the last traded price is taken for computation of
the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's
closing price is taken for computation of Index closure. The use of Index Closure Algorithmprevents any intentional manipulation of the closing index value.
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, additionalissue 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.
TheIndex Cellof the exchange does the day-to-day maintenance of the index within the broad
index policy framework set by the Index Committee. The Index Cellensures that SENSEX and
all the other BSE indices maintain their benchmark properties by striking a delicate balancebetween 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.
On-Line Computation of the Index
http://www.bseindia.com/http://www.bseindia.com/ -
8/2/2019 SM Handout
18/29
During market hours, prices of the index scrips, at which trades are executed, are automatically
used by the trading computer to calculate the SENSEX every 15 seconds and continuously
updated on all trading workstations connected to the BSE trading computer in real time.
Adjustment for Bonus, Rights and Newly issued Capital
The arithmetic calculation involved in calculating SENSEX is simple, but problem arises whenone 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, thebase 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. Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the free-float
market capitalisation 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 thenmade to the Base Market Capitalisation (see 'Base Market Capitalisation Adjustment' below).
Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the market
capitalisation of that company does not undergo any change. Therefore, there is no change inthe Base Market Capitalisation, only the 'number of shares' in the formula is updated.
Other Issues:
Base Market Capitalisation Adjustment is required when new shares are issued by way ofconversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-
back of shares, corporate restructuring etc.
Base Market Capitalisation Adjustment:
The formula for adjusting the Base Market Capitalisation is as follows:
New Mkt. Cap.
New Base Market = Old Base Market X ------------------------
Capitalisation Capitalisation Old Mkt. cap.
To illustrate, suppose a company issues right shares, which increases the market capitalisation of
the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation (Old
Base Market Capitalisation), say, is Rs.2450 crores and the aggregate market capitalisation of allthe shares included in the index before the right issue is made is, say Rs.4781 crores. The "New
Base Market Capitalisation " will then be:
2450 x (4781+100)
------------------------ = Rs.2501.24 crores
4781
-
8/2/2019 SM Handout
19/29
This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index
number from then onwards till the next base change becomes necessary.
Criteria for Selection and Review of SENSEX Constituents
The scrip selection and review policy for BSE Indices is based on the objective of:
Improvement Transparency
Simplicity
Qualification Criteria:
The general guidelines for selection of constituent scrips in SENSEX are as follows:
A. Quantitative Criteria:
1. 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 six-month
average full market capitalisation and 25% weightage to the liquidity rank based on six-
month average daily turnover & six-month average impact cost.2. Trading Frequency: The scrip should have been traded on each and every trading day
for the last six months. Exceptions can be made for extreme reasons like scrip suspensionetc.
3. Market Capitalization Weightage: The weight of each scrip in SENSEX based on six-
month average Free-Float market capitalisation should be at least 0.5% of the Index.4. Industry Representation: Scrip selection would take into account a balanced
representation of the listed companies in the universe of BSE. The index companies
should be leaders in their industry group.
5. Listed History: The scrip should have a listing history of at least 3 months on BSE.However, the Committee may relax the criteria under exceptional circumstances.
B. Qualitative Criteria:
Track Record:
In the opinion of the Committee, the company should have an acceptable track record.
Index Review Frequency
The Index Committee meets every quarter to review all BSE indices. However, every review
meeting need not necessarily result in a change in the index constituents. In case of a revision in
the Index constituents, the announcement of the incoming and outgoing scrips is made six weeksin advance of the actual implementation of the revision of the Index.
National Stock Exchange (NSE)The National Stock Exchange of India (NSE) was incorporated in November 1992 as a tax-paying company. In June 1994, it commenced operations in the Wholesale Debt Market (WDM).
In November, the same year, the Capital Market (Equities) segment commenced operations andthe Derivatives segment in June 2000.
In the past and even now, it plays a pivotal role in the development of the country's capitalmarket. This is recognised worldwide and its index, Nifty, is also tracked worldwide. Earlier it
-
8/2/2019 SM Handout
20/29
was an Association of Persons (AOP), but now it is a demutualised and corporatised entity
incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and ExchangeBoard of India (SEBI).
NSE S&P CNX Nifty 50 Index
S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the economy.
Since the index consists of many securities (50 securities) it is very difficult to manipulate the
index.
1. It is used for a variety of purposes such as benchmarking fund portfolios, index based
derivatives andindex funds.
2. The total traded value of all Nifty stocks is approximately 70% of the traded value of all
stocks on the NSE3. Nifty stocks represent about 59% of the total market capitalization
4. S&P CNX Nifty isprofessionally maintainedand is ideal for derivatives trading
5. The base period selected for S&P CNX Nifty index is the close of prices on November 3,
1995, which marks the completion of one year of operations of NSE's Capital Market
Segment.
6. The base value of the index has been set at 1000 and a base capital of Rs.2.06 trillion.
7. Nifty is a price index and hence reflects the returns one would earn if investment is made
in the index portfolio.
8. However, a price index does not consider the returns arising from dividend receipts. Only
capital gains arising due to price movements of constituent stocks are indicated in a price
index. Therefore, to get a true picture of returns, the dividends received from the constituent
stocks also need to be factored in the index values. Such an index, which includes the
dividends received, is called the Total Returns Index.
Calculation of Nifty
Total Returns Index reflects the returns on the index arising from
(a) Constituent stock price movements and
(b) Dividend receipts from constituent index stocks
http://www.nseindia.com/content/indices/ind_niftylist.htmhttp://www.nseindia.com/content/indices/ind_niftytrading.htmhttp://www.nseindia.com/content/indices/ind_niftytrading.htmhttp://www.nseindia.com/content/indices/ind_indexfunds.htmhttp://www.nseindia.com/content/indices/ind_indexfunds.htmhttp://nse-india.com/content/indices/ind_niftymaintenance.htmhttp://nse-india.com/content/indices/ind_niftymaintenance.htmhttp://nse-india.com/content/indices/ind_niftymaintenance.htmhttp://www.nseindia.com/content/indices/ind_niftylist.htmhttp://www.nseindia.com/content/indices/ind_niftytrading.htmhttp://www.nseindia.com/content/indices/ind_niftytrading.htmhttp://www.nseindia.com/content/indices/ind_indexfunds.htmhttp://nse-india.com/content/indices/ind_niftymaintenance.htm -
8/2/2019 SM Handout
21/29
Methodology for Total Returns Index (TR) is as follows:
The following information is a prerequisite for calculation of TR Index:
1. Price Index close
2. Price Index returns3. Dividend payouts in Rupees
4. Index Base capitalization on ex-dividend date
Dividend payouts as they occur are indexed on ex-date.
Dividend Payout (Rs)
Indexed dividend = ------------------------------------ x 1000Base Cap of Index (Rs.)
Indexed dividends are then reinvested in the index to give TR Index.
Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +
[Indexed dividends + (Indexed dividends * Index returns)]
Base for both the Close index and TR index close will be the same.
Example:
Base index for both the Index and TR Index is 1000.
Day Dividend Payout Base capitalization Indexed Dividend
7 Rs.15,00,00,000 Rs.15,50,00,00,00,000 0.09677
10 Rs.22,00,00,000 Rs.15,72,50,00,00,000 0.13991
Index Return = (Current index- Prev. index)/ Prev. index.
Day Index close Index return Indexed Dividend TR Index
1 1000 1000
2 988.92 -0.01108 988.92
3 978.22 -0.01082 978.22
4 964.01 -0.01453 964.01
5 953.07 -0.01135 953.076 948.82 -0.00446 948.82
7 917.26 -0.03326 0.096774 917.3536 *
8 902.56 -0.01603 902.6521
9 913.21 0.0118 913.3031
10 904.08 -0.01 0.139905 904.3107 **
-
8/2/2019 SM Handout
22/29
11 898.86 -0.00577 899.0894
12 892.79 -0.00675 893.0178
* = [948.82 + (948.82 * -0.03326)] + [0.096774 + (0.096774 * -0.03326)]
= 948.82 + (-31.5577532) + 0.096774 + (-0.00321870324)= 917.2622468 + 0.09355529676
= 917.3536 (rounding)
** = [913.3031 + (913.3031 * -0.01)] + [0.139905 + (0.139905 * -0.01)]
= 913.3031 + (-9.133031) + 0.139905 + (-0.00139905)= 904.170069 + 0.13850595
= 904.3107 (rounding)
Note: The indexed dividend on Day 7 will participate in the TR index from Day 7 and the
indexed dividend on Day 10 will participate from Day 10.
NSE Group
National Securities Clearing Corporation Ltd. (NSCCL)
It is a wholly owned subsidiary, which was incorporated in August 1995 and commenced
clearing operations in April 1996. It was formed to build confidence in clearing and settlement of
securities, to promote and maintain the short and consitent settlement cycles, to provide acounter-party risk guarantee and to operate a tight risk containment system.
NSE.IT Ltd.
It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is uniquelypositioned to provide products, services and solutions for the securities industry. NSE.IT
primarily focus on in the area of trading, broker front-end and back-office, clearing andsettlement, web-based, insurance, etc. Along with this, it also provides consultancy andimplementation services in Data Warehousing, Business Continuity Plans, Site Maintenance and
Backups, Status Mainframe Facility Management, Real Time Market Analysis & Financial
News.
India Index Services & Products Ltd. (IISL)
It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and indexrelated services and products for the Indian Capital markets. It was set up in May 1998. IISL has
a consulting and licensing agreement with the Standard and Poor's (S&P), world's leading
provider of investible equity indices, for co-branding equity indices.
National Securities Depository Ltd. (NSDL)
NSE joined hands with IDBI and UTI to promote de-materialisation of securities. This step was
taken to solve problems related to trading in physical securities. It commenced operations inNovember 1996.
DotEx International Limited
-
8/2/2019 SM Handout
23/29
DotEx was formed to provide a well structured inter trading platform for the members to further
offer online trading facilities to their customers. With this facility, the members can serve a
larger clientele with the use of automated risk management features and hence increase thevolume. The investors also get comprehensive and updated information through it.
NSE Facts It uses satellite communication technology to energise participation from around 400
cities in India.
NSE can handle up to 1 million trades per day.
It is one of the largest interactive VSAT based stock exchanges in the world.
The NSE- network is the largest private wide area network in India and the first extended
C- Band VSAT network in the world.
Presently more than 9000 users are trading on the real time-online NSE application.
SEBI - SEBI Administration
SEBI, established in 1988 and became a fully autonomous body by the year 1992 withdefined responsibilities to cover both development & regulation of the market
The Securities and Exchange Board of India Act, 1992 is having retrospective effect and is
deemed to have come into force on January 30, 1992. Relatively a brief act containing 35
sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India.
A Board by the name of the Securities and Exchange Board of India (SEBI) was constituted
under the SEBI Act to administer its provisions. It consists of one Chairman and five members.
One each from the department of Finance and Law of the Central Government, one from the
Reserve Bank of India and two other persons and having its head office in Bombay and regional
offices in Delhi, Calcutta and Madras.
The Central Government reserves the right to terminate the services of the Chairman or any
member of the Board. The Board decides questions in the meeting by majority vote with theChairman having a second or casting vote.
Section 11 of the SEBI Act provides that to protect the interest of investors in securities and to
promote the development of and to regulate the securities market by such measures, it is the dutyof the Board. It has given power to the Board to regulate the business in Stock Exchanges,
register and regulate 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, portfoliomanagers, investment advisers, etc., also to register and regulate the working of collective
investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and
insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges,etc.
All the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment
-
8/2/2019 SM Handout
24/29
advisers and such other intermediary who may be associated with the Securities Markets are to
register with the Board under the provisions of the Act, under Section 12 of the SEBI Act. The
Board has the power to suspend or cancel such registration. The Board is bound by the directionsvested by the Central Government from time to time on questions of policy and the Central
Government reserves the right to supersede the Board. The Board is also obliged to submit a
report to the Central Government each year, giving true and full account of its activities, policiesand programmes. Any one of the aggrieved by the Board's decision is entitled to appeal to the
Central Government.
Glossary of Stock Exchange
BOLT - BSE-On-Line-Trading
Badla
Carrying forward of transaction form one settlement period to the next without effecting delivery
or payment.
Bull
A bull is a operator expecting a rise in price so that he can later sell at a higher price.Bull Market
A rising market with abundance of buyers and few sellers.
Bear
An individual who expects price to go down.
Bear Markets
A weak or falling market characterised by absence of buyers.
Blue Chips
Blue Chips are shares of large, well established and financially sound companies with animpressive records of earnings and dividends. Generally, Blue Chip shares provides low to
moderate current yield and moderate to high capital gains yield. The price volatility of such
shares is moderate.Floating Stock
The fraction of the paid-up equity capital of a company, which normally participates in day-to-
day trading. On an average, about 30 per cent of equity capital is held by promoters; another 30
per cent by financial institutions and the balance 40 percent by the public, mostly for long-terminvestment. Consequently, the floating stock of a company rarely exceeds 15 - 20 percent of its
equity capital. Low floating stock causes erratic price movement as in the case of securities in the
non-specified shares.
Floor Price
The minimum offer price below which bids cannot be entered. The Issuer Company in
consultation with the Book Running Lead Manager fixes the floor price.
Cash SettlementPayment for transactions on the due date as distinct from carry forward (Badla) from one
settlement period to the next.
Clearing Days or Settlement Days
Dates fixed in advance by the exchange for the first and last business days of each clearing. The
intervening period is called settlement period which is normally one week in the case of
'specified' shares and ten days in the case of 'non-specified' securities.
Clearing House
-
8/2/2019 SM Handout
25/29
Each Exchange maintains a clearing house to act as the central agency for effecting delivery and
settlement of contracts between all members. The days on which members pay or receive the
amounts due to them are called pay-in or pay-out days respectively.
Delivery
A transaction may be for "spot delivery" (delivery and payment on the same or next day) "hand-delivery" (delivery and payment on the date stipulated by the exchange, normally within two
weeks of the contract date), special delivery (delivery and payment beyond fourteen days limit
subject to the exact date being specified at the time of contract and authorized by the exchange)or "clearing" (clearance and settlement through the clearing house).
Bargain
Transaction between two members of the exchange. The terms "dealings" and "contracts" also
have identical meanings.
Jobbers
Member brokers of a stock exchange who specialise in buying and selling of specific securities
from and to fellow members. Jobbers do not have any direct contact with the public, but they
render a useful function of imparting liquidity to the market.Jobber's Spread
The difference between the price at which a jobber is prepared to sell and the price at which he isprepared to buy. A large difference reflects an imbalance between supply and demand.
Kerb Dealings
"Khangi Bhao" or 'band ke Bhao'. Transactions done on behalf of members after the officialclose of the trading hours in the street or at the entrances to or in the vicinity of the Stock
Exchange. The Bye-laws of the Stock Exchange, Mumbai prohibit its members from
participating in kerb dealing.
Bid
A bid is the demand for a security that can be entered by the syndicate/sub-syndicate members in
the system. The two main components of a bid are the price and the quantity.
Listed Company
A public limited company which satisfies certain listings conditions and signs a listing agreement
wit the stock exchange for trading in it securities. One important listing condition is that 25% of
its issued capital should be offered to the public.
Rights Issues
The issues of new shares to existing shareholders in a fixed ratio to those already held at a price
which is generally below the market price of the old shares.
Selling Short
Normally one buys a security and then sells it later. This is described as going long and is
profitable in rising markets. The reverse process-selling a security first, and then buying it later,
is called selling short. This is profitable in a declining market.
Settlement Period
For administrative convenience, the stock exchange divides the year into a number of settlement
periods each of generally one weeks duration in respect of 'specified shares' and one weekduration in respect of 'non-specified' securities. The first and the last day trading of each
settlement period are fixed in advance and so are settlement days for delivery and payment.
Specified Shares
-
8/2/2019 SM Handout
26/29
For the purpose of trading, a security is categorised either as a 'specified' shares or a 'non-
specified' security. This is done by stock exchange authorities.
Stamp Duty
The ad valorem duty of 1/2 per cent payable by buyers for transfer of shares in their name.
Syndicate Members
Syndicate Members are the intermediaries registered with the Board and permitted to carry onactivity as underwriters. The Book Running Lead Managers to the issue appoints the Syndicate
Members.
Unit of Trading
The minimum number of shares of a company which are accepted for normal trading on the
stock exchange. All transactions are generally done in multiple of trading units. Odd lots are
generally traded at a small discount.
Volume of Trading
The total number of shares which change hands in a particular company's securities. It is the sum
of either purchases or sales which necessarily equal. This information is useful in explaining and
interpreting fluctuations in share prices.
BidderThe person who has placed a bid in the Book Building process.
Bonus
A free allotment of shares made in proportion to existing shares out of accumulated reserves. A
bonus share does not constitute additional wealth to shareholders. It merely signifies
recapitalization of reserves into equity capital. However, the expectation of bonus shares has abullish impact on market sentiment and causes share prices to go up.
Book Closure
Dates between which a company keeps its register of members closed for updating prior to
payment of dividends or issue of new shares or debentures.
Book Running Lead Manager
A Lead Merchant Banker who has been appointed by the Issuer Company as the Book Runner
Lead Manager. The name of the Book Runner Lead Manager is mentioned in the offer documentof the Issuer Company.
Corner
A situation where by a single interest or group has acquired such control of a security that thesecannot be obtained or delivered for performance of existing contracts except at exorbitant prices.
In such situations, the Governing Board may intervene to regulate or even prohibit further
dealings in that security.
Correction
Temporary reversal of trend in share prices. This could be a reaction (a decrease following a
consistent rise in prices) or a rally (an increase following a consistent fall in prices).
Crisis
Reckless heavy short-sales leading to unduly depressed prices. In such a situation, the Governing
Board may prohibit short sales, fix minimum prices below which sells or purchases are not
permitted and limit further dealings only to closing out of existing contracts.
Ex
Means "without". A price so quoted excludes recently declared dividend right or bonus shares
Governing Board
-
8/2/2019 SM Handout
27/29
A stock exchange functions under the direction and supervision of its Governing Board. It
generally consists of a specified number of elected members, a whole time Executive Director
and representatives of the Government. Securities and Exchange Board of India (SEBI) andpublic. The size and structure of the board varies from exchange to exchange
Limit Orders
Instruction to the broker limiting him to buying at a stated maximum price or selling at a statedminimum price.
Long Position
A bull position in a security.
Merchant Banker
An entity registered under the Securities and Exchange Board of India (Merchant Bankers)
Regulations, 1999.
Moorat Trading
Auspicious trading on Diwali day during specified hours.
Order Book
It is an 'electronic book' that shows the demand for the shares of the company at various prices.
FAQs
What should a stock market index be?
A stock market index should capture the behaviour of the overall equity market. Movements of
the index should represent the returns obtained by "typical" portfolios in the country.
What do the ups and downs of an index mean?
They reflect the changing expectations of the stock market about future dividends of India'scorporate sector. When the index goes up, it is because the stock market thinks that the
prospective dividends in the future will be better than previously thought. When prospects of
dividends in the future become pessimistic, the index drops. The ideal index gives us instant-to-instant readings about how the stock market perceives the future of India's corporate sector.
What is the basic idea in an index?
Every stock price moves for two possible reasons: news about the company (e.g. a productlaunch, or the closure of a factory, etc.) or news about the country (e.g. nuclear bombs, or a
budget announcement, etc.). The job of an index is to purely capture the second part, the
movements of the stock market as a whole (i.e. news about the country). This is achieved byaveraging. Each stock contains a mixture of these two elements - stock news and index news.
When we take an average of returns on many stocks, the individual stock news tends to cancel
out. On any one day, there would be good stock-specific news for a few companies and bad
stock-specific news for others. In a good index, these will cancel out, and the only thing left willbe news that is common to all stocks. The news that is common to all stocks is news about India.
That is what the index will capture.
What kind of averaging is done?
For technical reasons, it turns out that the correct method of averaging is to take a weighted
average, and give each stock a weight proportional to its market capitalisation. Suppose an indexcontains two stocks A and B. A has a market capitalisation of Rs.1000 crore and B has a market
-
8/2/2019 SM Handout
28/29
capitalisation of Rs.3000 crore. Then we attach a weight of 1/4 to movements in A and 3/4 to
movements in B.
What is the portfolio interpretation of index movements?
It is easy to create a portfolio, which will reliably get the same returns as the index, i.e. if the
index goes up by 4%, this portfolio will also go up by 4%. Suppose an index is made of twostocks, one with a market cap of Rs.1000 crore and another with a market cap of Rs.3000 crore.
Then the index portfolio will assign a weight of 25% to the first and 75% weight to the second. If
we form a portfolio of the two stocks, with a weight of 25% on the first and 75% on the second,then the portfolio returns will equal the index returns. So if you want to buy Rs.1 lakh of this
two-stock index, you would buy Rs.25,000 of the first and Rs.75,000 of the second; this portfolio
would exactly mimic the two-stock index. A stock market index is hence just like other price
indexes in showing what is happening on the overall indexes -- the wholesale price index is acomparable example. In addition, the stock market index is attainable as a portfolio.
Why are indexes important?
Traditionally, indexes have been used as information sources. By looking at an index we knowhow 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 highlyuptodate 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 infinance, 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 inthe 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 theoverall 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 benchmarkagainst which the fund manager will be compared, and in what fashion.
What kinds of indexes exist?
The most important type of market index is the broad-market index, consisting of the large,liquid stocks of the country. In most countries, a single major index dominates benchmarking,
index funds, index derivatives and research applications. In addition, more specialised indexes
often find interesting applications. In India, we have seen situations where a dedicated industryfund 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.
When a stock goes out and a new stock comes in, doesn't that make index levels non-
comparable?
-
8/2/2019 SM Handout
29/29
No. There are mathematical formulas, which ensure that yesterday's value and today's are
comparable, even if a change in composition takes place in-between. Think of an index as a
portfolio. The composition of the portfolio changes, but it is still meaningful to keep measuringthe overnight returns on the portfolio from day to day. These returns, cumulated up, are the index
level.
Why does the index keep changing from time to time?
Think of a liquid stock as a good thermometer, one which gives accurate data about the true price
of the stock, because it trades actively with a tight spread. The prices observed for an illiquidstock are like readings from a low quality thermometer, which reports noisy data about the
phenomenon of interest (the true price of the security). We try to find the fifty best thermometers
in the country and average their values to make the S&P CNX Nifty. As time passes, better
thermometers become available (in the form of large, liquid stocks that are not in the S&P CNXNifty). We would like that S&P CNX Nifty always uses the best thermometers possible. So we
remove the weakest thermometer from inside the S&P CNX Nifty and accept the new stock into
it. The world changes, so the index should change. Yet, the change should not be sudden - for
that would disrupt the character of the index. S&P CNX Nifty uses clear, researched and publiclydocumented rules for index revision. These rules are applied regularly, to obtain changes to the
index set. Index reviews are carried out every quarter to ensure that each security in the indexfulfills all the laid down criteria. IDBI was once not listed; SBI was once illiquid; Infosys was
once an obscure software startup. The world changes, and one by one, these stocks have come
into the S&P CNX Nifty. Each change in the S&P CNX Nifty is small, so the continuity of theindex is maintained. Yet, at all times, S&P CNX Nifty represents the 50 most important liquid
stocks in the country, the best thermometers to build an index out of.
Rolling Settlement
With effect from 2nd July, 2001, 414 scrips including Equity shares of BSES Limited are traded
across all exchanges in Compulsory Rolling Settlement introduced as per directive from
Securities and Exchange Board of India (SEBI). Till 30th June, 2001, the trades carried out fromMondays to Fridays were settled by payment of monies and delivery of securities in the
following week. For example, at BSE the pay-in and pay-out of the transactions done on
Mondays used to take place on Thursday of the following week. In rolling settlement system, thetrading period (T) is one day. Obligations are netted off and determined on the basis of trades
done on trading day (T). The obligations have to be settled on the 5th working day in a T + 5
rolling settlement scheme. Typically, a trade done on a Monday will be settled on the following
Monday. Since every day will be settlement day in the rolling settlement regime, rollingsettlement is done only in the case of shares held in demat mode. SEBI has advised the
depository participants to instruct their clients to submit the settlement instructions at least two
days (one day in case of auction) prior to the pay-in date. Further, the scrips which are not oncompulsorily rolling settlement from 2nd July, 2001, will be brought under compulsorly rolling
settlement with effect from 2nd Janua