grandfianleinvestment in equities (1)

8/3/2019 GRANDFIANLEinvestment in Equities (1)

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INVESTMENT IN EQUITIES===============================================================

2. DFIFFERENT MODES OF INVESTMENT

1. SHARES: An investor may purchase share in a companys equity. Hecalculates that the company is likely to make a profit in the future and thus

he will receive a return on his investment by way of dividends and

bonuses. But this is not usually the reason why most investors who are

into shares have bought them. The stock prices of companies fluctuate

over periods of time due to various intrinsic and extrinsic factors affecting

it. Simply put, the investor buys the share when price is low and sells

when it is high, and the difference is profit he makes.

2. FIXED DEPOSIT : FDs can be made into banks, private companies and

other institutions. These have medium to high return depending upon the

risk factor. The popularity of fixed deposits is fading out because of

shutting down of many institutions, which were offering FDs. The main

advantage of fixed deposits is it serves the purpose of middle class people

who prefer limited return at minimum risk.

3. DEBENTURES & BONDS: Debentures are securities sold by government

and industry that raise the funds for their capital and revenue expenditure.

The rate of interest and time of maturity is prefixed. On the maturity of the

debenture, the investor receives his return. They are long-term securities

normally with a maturity period ranging from 5-20 years. They may even

be listed in the stock exchange and can be traded.

Bonds are securities similar to debentures but the difference is that the

capital collected will be invested in projects for which the bond has been declared

for e.g. government infrastructure bonds invest only in infrastructure development

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expenditures. Such securities and bonds usually offer a low return r5ate in

exchange for safety and surety of return. Debentures may also be secured

against the security of a particular asset, or unsecured if they are raised as a

general loan.

4. GOLD, SILVER & PLATINUM: Gold is a universal investment tool. In the

sense, it can be bought and sold anywhere in the world. The reason gold

is considered a great investment is because it will never lose its value.

Even during war and political turmoil, while all other investment tools lose

valuation, golds value rises. This has led to many countries in the world

storing much of their reserves in form of gold and silver bullion. It is such

type of assets which can be liquidate anytime, anywhere, & in any

currency. The gold market is very flexible and so one should liquidate the

gold when rate is high and purchase when the rate drops down. But the

major constraint in investment in gold, silver, & platinum is most of the

people in India love to stock the gold in the form of ornaments & they do

not want to part with it even they get huge return on their on their

investment. It is very difficult to change the mentality of the common man

to treat Gold or silver as trading asset and not as a status indicator.

5. MUTUAL FUNDS: Mutual funds have newly been cast into limelight with

the booming economy. A mutual fund is a tool used by company or

agency to collect investment from the public to reinvest it in any of the

other investment instruments. The funds assure a certain minimum return

and tempt you with the possibility of greater return if their investments

prove fruitful. Since the mutual funds are managed by qualified

professionals in the field and the returns are satisfactory, it attract high

participation from public.

6. COMMODITIES; An upcoming investment avenue is the commodity

market. Normally, it consists of huge quantities of commodities like rice,

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pulses, spices etc. being traded. The prices of commodities fluctuate

depending on the commodity and market conditions. The investor trade in

commodity market to take the advantage of the heavy price fluctuation

and make his profit.

.

7. DIAMONDS AND OTHER PRECIOUS STONES : Thevalue of diamonds

and other precious stones can be used as an investment. Like gold and

silver, the value of precious stones is also very good tool of investment

and gives a very reasonable return with utmost safety and is a very good

hedge against inflation. Diamonds and precious stones, along with the

precious metals are considered to be safest investment.

8. GOLD BONDS: Safeguarding gold is a very difficult task and is also

against national economic interest. If gold has to be bought purely for

investment purposes rather than for sentimental or esteem purpose, it is

wiser to purchase a gold bond. By purchasing a gold bond, the

government buys and stores gold against your payment. It may be

converted into gold at the time of maturity of the bond or alternatively, the

government may buy back the bond at the prevalent gold rate. It may alsobe traded in the stock exchange. It has good liquidity.

9. ART & ANTIQUES: Art and antiques are also considered tools of

investment as their value may appreciate with time but it requires

expertise in the field of valuation of the artwork or antique piece.

10. LAND & HOUSE PROPERTY: Land and house property value

appreciates with time and development of the surrounding area or due to

discovery of resources specified to that area. The advantages are that it

can also be used for self-use, have moderate return, capital growth. This

is one of the most preferred avenues. The major disadvantage of investing

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in house property is one time investment is huge & income starts after 2/3

years of investment due to time involved in completion of construction.

11. PRIVATE LENDING: In a situation of private lending, the lender gets to

choose his own rate of interest. This goes on primarily in smaller towns

and villages, or when the borrower is not able to get a loan from a bank.

The lender has an advantage of being able to fix his own rate of interest

but this factor is balanced out by the fact that risk is very high of borrower

being able to repay the loan.

12. VENTURE CAPITAL: Capital may be invested into a project that seems

feasible and profitable to the investor. It is similar to equity-to-equity but

there are usually no other share holder expect for the promoters.

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3. A COMPARATIVE ANALYSIS

The following table aims to display a comparative analysis of some of the tools

considering some of the vital factors that have to be considered while making an

investment. These factors are:

1. Risk factor: the assurance to the investor that his money and earnings are

safe.

2. Return on investment (ROI) : The average range of rate of interest offered.

3. Length: The period of time for which the money is blocked.

4. Liquidity: How easily tool can be encashed.

5. Bonuses: The possibility of added earnings.

Risk Factor ROI Length Liquidity** Bonuses

Shares Very High Unpredictabl

e

None Very High Yes

Debenture /

Bonds

Low/Medium

*

Medium/Low* Long High Yes

Gold Very Low Predictable None High NoMutual Fund High/Medium Unpredictabl

e

Short High Yes

CommoditiesVery High Unpredictabl

e

None Very High No

Gold Bonds Very Low Predictable Medium High NoPrecious

Stones

Very Low Predictable None Low No

Art & Antique High/Medium Unpredictabl

e

Long Very Low No

Land &

Property

Low Reasonable Long Medium No

PrivateLending

Very High Very High None Very Low No

Venture

Capital

Very High Unpredictabl

e

Medium Very Low Yes

*where government securities are concerned, risk is considerably low.

**Short Term 1-3 Yrs, Medium Term 3-5 Yrs, Long Term 5 Yrs & Above

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INTRODUCTION TO EQUITY SHARES

Equity shares are those shares, which do not enjoy preferential rights in thematter of payment of dividend & repayment of capital. The dividend of equity

shares is not fixed & may vary from year to year depending upon the amount of

profits available. Equity shareholders gets much higher rate of dividend if there is

huge profit for company, & equity shareholders are entitled to get bonus shares.

Let us minutely understand the fundamentals of shares or equity. A share may

be defined as: A certificate or book entry representing ownership in a

corporation or firm.

OR A document signifying part ownership in a company.

A share or stock represents ownership in company. When you buy a share in

a company you become a joint owner of the business and share in future of that

business. It is also known as equity. A share is unlike debts given to the

company.

The Rights of Equity Shareholders :

Bonus Shares : Bonus shares are those shares which are allotted to equity

shareholders instead of dividend which is payable in the form of cash. Generally

bonus shares issued when company earns tremendous profits.

Right Shares :- Right shares are those shares which are new lot or issue of

shares of company, these shares are offered to their existing shareholders.

Voting Rights : Equity shareholders being owners of company, enjoy voting rights

in general meetings of company. They can also appoint a proxy to vote all theirbehalf. They elect the directors & appoint auditors.

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2. VARIOUS TYPES OF MARKETS.

The NEAT system supports an order driven market, wherein orders match on

the basis of time & price priority. All quantity fields are in units & prices arequoted in Indian Rupees. We have discussed various types of trades or

markets of Capital Market system:

A. Normal Market: -

Normal market is ordinary market where securities or shares are procures & sold.

This is a general meaning of normal market. The Normal market consists of

Regular Lot orders & Stop Loss orders. These types are discussed in detail

below:

REGULAR LOT ORDERS: - An order which has no special condition associated

with it is a Regular Lot order. When a dealer places the order, the system looks

for a corresponding Regular Lot order existing in the market (Passive orders). If it

does not find a match at the time it enters the system, the order is stacked in the

Regular Lot book as a passive order. By default, the Regular Lot book appears in

the order entry screen in the normal market.

Order Matching Priority

There are so many orders are executed in the exchanges. In NSE 124 orders are

placed per second. So to manage such huge turnover without any partiality is not

a simple thing. So all those orders are matched on the basis of preferences or

priorities.

The best sell order is the order with the lowest price & a best buy order is the

order with the highest price. The unmatched orders are queued in the system by

the following:

(a) By Time (b) By Price.

(a) By Price: - A buy order with higher price gets a higher priority & similarly ,

a sell order with a lower price gets a higher priority. E.g. Consider the

following buy orders:

100 shares @ Rs. 35 at time 9.30 a.m.

500 shares @ Rs. 35.05 at time 9.43 a.m.

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the Trigger price of that shares is Rs.143 then he can save his further loss by

squaring off those shares. We have discussed terminology of Trigger price in

next paragraph.

HOW THE TRADE GOES ON:

Entering the orders: Stop Loss orders are released into the market when the last

traded price for that security in the normal market reaches or surpasses the

trigger price.

Trigger Price: It is the price at which the order gets triggered or squared off from

the stop loss book.

Limit Price: It is the price for orders after the orders get triggered or squared off

from the stop loss book.

Before triggering, the order does not participate in matching and the order cannot

get traded. Untriggered stop loss orders are stacked in the stop loss book. The

stop loss orders can be either a market order or a limit price order. For buy SL

orders, the trigger price has to be less than or equal to the limit price. Similarly,

for sell SL order, the trigger price has to be greater than or equal to limit price.

Matching Orders: All stop loss orders entered into the system are stored in the

stop loss book. These orders can contain two prices; they are Trigger Price &

Limit Price, which we have discussed in earlier part. . If Limit price is not

specified then trigger price is taken as the limit price for the order. The stop loss

orders re prioritized in the stop loss book with the most likely order to trigger first

& least likely to trigger last. The priority is same that of regular lot book.

The stop loss condition is met under following circumstances:

Sell order A sell order in the stop loss book gets triggered when the last traded

price in the normal market reaches or falls below the trigger price.

Buy Order A buy order in the stop loss book gets triggered when the last traded

price in the normal market reaches or exceeds the trigger price.

That is how the order matching process goes on in stop loss book. For those

person who has patience & who dont want to take a high market risk as well as

those who want to invest for long term in market , Stop Loss orders has proved a

benediction for them.

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B. Odd Lot Market.:-

The Odd Lot market facility is used for the Limited Physical Market. The main

features of the market is that it deals in Physical form of shares. Today all the

stock exchanges has made it mandatory to possess De-mat of securities for all

investors. The SEBI has given directives to all exchanges regarding De-mat

settlement of shares. Odd Lot market falls under Limited Physical Market, which

is a different market segment referred to as Limited Physical Market. This

market was introduced on June 1999 by NSE.

We have discussed some of the salient features of this Limited Physical Market:

Trading conducted in the Odd Lot market with Book Type OL & series BT.

Order quantities should not exceed 500 shares.

The base price & price bands applicable in the limited Physical

Market are same as those applicable for the corresponding Normal

Market on that day.

Trading hours will also be the same as Normal market & holidays

too.

Trading members are required to ensure that shares are duly

registered in the name of the investor before entering orders ontheir behalf on a trade date.

Settlement for all trades are done on a trade-for trade basis and

delivery obligations arise out of each trade. That means physical

deliveries should made & recorded time to time. Its obligatory for all

the parties.

Orders gets matched when both the price & the quantity match in

the buy & sell order. Orders with the same price & quantity match

on the time priority i.e. orders which have entered into system will

get matched first like first come first serve basis. The time priorities

& price priorities are same, as we have discussed in the Normal

Market.

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The order matching takes place only for orders in Odd Lot book.

There are no partial trades for an Odd Lot order i.e. each match is

an exact match where the quantity of the passive order is equal to

that of the active order.

Even though turnover of this trade is low but this market has given

a kind of assurance to those investors who hesitates to adopt this

new technology i.e. De-mat facility, it has proved correct step to

attract or to bring those investors into market.

This market has also eradicated the problems of bad deliveries; it

removes fear of loss of shares in the mind of investor.

This market can be useful to those peoples, who live in rural area.

C. Auction Market: - Auctions are initiated by the exchange on behalf of

trading members for settlement related reasons. The main reasons are

shortages, Bad deliveries and Objections. These are three main causes &

also problems for any trade procedure. Auction gives a fair chance to any

member to get those shares which wants to get. It eradicates partiality &favoritism & brings a fair competitive atmosphere among investors.

There are mainly three parties in Auction market:

Initiator :- The party who initiates the auction process.

Competitor :- The party who enters on the same side as initiator is called

Competitor.

Solicitor :- The party who enters on the opposite side as of the initiator is called

Solicitor.

HOW THE TRADE GOES ON :

The trading members can enter in the exchange initiated auctions by entering

orders as a Solicitor. Say for Example. If the exchange conducts a Buy-in action,

the trading members shall enter sell orders, are called Solicitors. The Auction

starts with the competition period. Competition period is the period during which

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competitor order entries allowed. Competitors orders are the orders, which

competes with Initiators order. If initiators order is buy order then all orders of

competitors are Buy orders & vice-versa. After the competitors period the

solicitors period for the auction starts. Solicitors period is period during which

order entries are allowed. Solicitor orders opposites of initiators order.

When the Solicitor period is over then order matching takes place for that

auction. During this process the system calculates the trading price for the

auction based on the initiator order & orders entered during the competitor

period. At present for the Exchange initiated auctions, the matching takes place

at the respective solicitor order prices. After matching of orders entitled person

gets the stock of shares.

3. TRADE PROCEDURES / DEMAT ACCOUNTS .

Dematerialization and Electronic Transfer of Securities

Traditionally, settlement system on Indian stock exchanges gave rise to

settlement risk due to the time that elapsed before trades were settled byphysical movement of certificates. There were two aspects: First relating to

settlement of trade in stock exchanges by delivery of shares by the seller and

payment by the buyer. The stock exchange aggregated trades over a period of

time and carried out net settlement through the physical delivery of securities.

The process of physically moving the securities from the seller to his broker

to Clearing Corporation to the buyer's broker and finally to the buyer took

time with the risk of delay somewhere along the chain. The second aspect

related to transfer of shares in favor of the purchaser by the issuer. This

system of transfer of ownership was grossly inefficient as every transfer

involved the physical movement of paper securities to the issuer for

registration, with the change of ownership being evidenced by an

endorsement on the security certificate. In many cases the process of

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transfer took much longer than the two months as stipulated in the

Companies Act, and a significant proportion of transactions wound up

as bad delivery due to faulty compliance of paper work.

Transaction Cycle :-

Transaction cycle

The above diagram explains the trade procedure in systematic manner:

After completion of all the basic Legal, Financial formalities for commencement

of trade, a trade can be fulfilled by following procedure :-(a) Decision to Trade :-

This leads to beginning of trade. Every Investor has to take decision about

trade, which may be procuring of shares or selling of securities. Because any

Sub-Broker or Broker cant deal with the scrips of any of his client without his

authorization. But he can guide to his client about selling & buying of shares,

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Receiving members are required to collect the documents from the

Clearing House between 2:00 p.m. and 2:30 p.m. In NSE we have T+2

Rolling settlement, which means within 2 days of Trade Day. & all the

procedures should be completed within given 2 days, which is Obligatory

for both parties.

The settlement cycle for this segment is shown below:

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Valuation of shortages

based on closing prices

At T+1 closing

prices

Post Settlement Close out T+2 working days

(f) Funds/ securities :- Funds & securities gets transferred on the name of newbuyer of the security . It recorded in respective exchanges records. After that

whole trade cycle get completed. Currently, NSCCL offers settlement of funds

through 10 clearing banks namely Canara Bank, HDFC Bank, Global Trust

Bank, Indus-ind Bank, ICICI Bank, UTI Bank, Centurion Bank, Bank of India

and IDBI Bank, Standard Chartered Bank. Every Clearing Member is required to

maintain and operate a clearing account with any one of the empanelled clearing

banks at the designated clearing bank branches. The clearing account is to be

used exclusively for clearing & settlement operations. The Clearing Bank will

debit/ credit the clearing account of clearing members as per instructions

received from the Clearing Corporation. A Clearing member can deposit funds

into this account in any form, but can withdraw funds from this account only in

self-name.

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Settlement Agencies

The NSCCL, with the help of clearing members, custodians, clearing banks and

depositories settles the trades executed on exchanges. The roles of each of

these

entities are explained below:

(a) NSCCL: The NSCCL is responsible for post-trade activities of a stock

exchange. Clearing and settlement of trades and risk management are its

central functions. It clears all trades, determines obligations of members,arranges for pay-in of funds/securities, receives funds/securities, processes for

shortages in funds/securities, arranges for pay-out of funds/securities to

members, guarantees settlement, and collects and maintains

margins/collateral/base capital/other funds.

(b) Clearing Members: They are responsible for settling their obligations as

determined by the NSCCL. They have to make available funds and/or

securities in the designated accounts with clearing bank/depository participant,

as the case may be, to meet their obligations on the settlement day. In the

capital market segment, all trading members of the Exchange are required to

become the Clearing Member of the Clearing Corporation.

(c) Custodians: A custodian is a person who holds for safekeeping the

documentary evidence of the title to property belonging like share certificates,

etc. The title to the custodian's property remains vested with the original

holder, or in their nominee(s), or custodian trustee, as the case may be. In

NSCCL, custodian is a clearing member but not a trading member. He settlestrades assigned to him by trading members. He is required to confirm whether

he is going to settle a particular trade or not. If it is confirmed, the NSCCL

assigns that obligation to that custodian and the custodian is required to settle

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it on the settlement day. If the custodian rejects the trade, the obligation is

assigned back to the trading / clearing member.

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

file).NSCCL notifies the consummated trade details to CMs/custodians who

affirm back. Based on the affirmation, NSCCL applies multilateral

Netting and determines obligations.

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NSE

Depositories

NSCCL ClearingBanks

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

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

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

(5) Pay-in of securities (NSCCL advises depository to debit pool account

of custodians/CMs and credit its account and depository does it).

(6) Pay-in of funds (NSCCL advises Clearing Banks to debit account

of custodians/CMs and credit its account and clearing bank does it).

(7) Pay-out of securities (NSCCL advises depository to credit pool account

of custodians/CMs and debit its account and depository does it).

(8) Pay-out of funds (NSCCL advises Clearing Banks to credit account

of custodians/CMs and debit its account and clearing bank does it).

(9) Depository informs custodians/CMs through DPs.

(10) Clearing Banks inform custodians/CMs.

(d) Clearing Banks :- Clearing Banks are a key link between the clearing

members & NSCCL for funds settlement. Every clearing member is required

to open a dedicated settlement account with one of the clearing banks. Based

on his obligation as determined through clearing member makes fundsavailable in the clearing account for the pay-in & receives funds in case of a

pay-out.

The Clearing banks are required to provide following services as a single

window to all the members of National Securities Clearing Corporation Ltd. As

also to the Clearing Corporation :

Branch network in cities covers bulk of the trading cum clearing

members.

It should provide high speed automated Electronic Fund transfer

facility.

Stock lending facilities.

Services as Depository / participants all other banking facilities like

issuing bank guarantees/ credit facilities.

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Services as professional clearing member.

Free-of-cost funds transfer across centers.

(f) Depositories :- A depository is an entity where the securities of an

investor are held in Electronic form. It provides De-mat account facility. It

maintains precise record of an investors portfolio. Each custodian /

clearing member is required to maintain a clearing pool account with the

depositories .He is required to make available the required securities in

the designated account on settlement day. The Depository runs a

electronic file to transfer the securities from accounts of the custodians /

clearing member to that of NSCCL.

4. PAYMENT OF BROKERAGE.

The maximum brokerage chargeable by Trading Member (Main Broker) in

respect of trades affected in the securities admitted to dealings on the TM

segment of exchange is fixed at 2.5% of the contract price, exclusive of

statutory levies like, SEBI turnover fee, service tax & duty. This is the

maximum brokerage is inclusive of the brokerage charged by the Sub-Broker.

The Brokerage should be separately charged from the clients & shall be

indicated separately from the price, in the contract note. That means the TM

may not share brokerage with a person who is a TM or in employment of

another TM. But he can share brokerage of his Sub-Broker.

5. TAX LIABIALITY ON CLIENT

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The Investor has to pay some taxes on profit of selling & buying of shares.

Out of those taxes main tax under Income Tax Act is Capital Gains Tax.

The amount accrued from transactions of shares are treated under the head

of capital gains, because Investment in Equities is also a type of investment &

it is considered as a Asset for investor. That is why earnings accrue from

turnover of this, is called as Capital Gain.

The Capital Gains Tax is of two types i.e. Long Term Capital Gain & Short

Term Capital Gain.

Long term Capital gains tax this tax is levied upon selling or earning on

those securities who had possession for one year or more by an investor.

According to this budget this tax is exempt from tax.

Short term Capital gains tax this tax is levied upon selling or earning on

those securities who had possession less than one year or more by an

investor. It is also countable for intra-day players.

According to this budget this tax is not exempt from tax. So an investor has to

prepare his calculations of paying this tax.

Securities Turnover Tax (STT) -

This tax is legible on the taxable securities transactions. This is legible

separately on delivery & non-delivery based transactions including

transactions entered into Derivative Segment. Presently, rate & payment

structure of STT is given as under:

Nature Rate STT

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Delivery based purchases on recognized

stock

Exchange

0.1 Buyer

Delivery based sales on recognized stock

Exchange

0.1 Seller

Sales (without Delivery) on recognized stock

Exchange

0.025 Seller

Sale of Derivatives on recognized stock

Exchange

0.0133 Seller

Sale of units of an equity oriented

Fund to Mutual Fund.

0.02 Seller

These are some main tax liabilities on any investor, which any investor should

pay to retain his account clear & he should not be penalize.

6. PRIMARY MARKET

Primary Market refers to that market where those securities dealt which are firstly

introduced or new in the market. In past few months IPO has become a key word

The reason was it was a safe deal with very low risk . IPO refers Initial Public

Offer that means a Company is introducing a new securities in market . Primary

Market means dealing in new securities or those securities which are introduced

by existing company to raise funds from market to start new venture or to

expand their business. In general sense it is also known as First Hand Shares

Market. This market has a tremendous capacity of raising funds from market & it

is very profitable when a market is in boom period.

TYPES OR MODES OF PRIMARY EQUITY MARKET

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Public Issue:

Public Issue means IPO Initial Public Offer, where new equity shares sold into

Securities Market. This is very popular when Market is in boom period, it is quite

safe bet in boom period. It is a general invitation to public to acquire the shares of

company, by filling an application form for subscription of shares. Here the

shares will be allocated on the basis of demand for shares. If there is good

demand for shares like 100000 shares introduced & applications are 150000,

then (over-subscription) shares will be allotted on the basis of policy of company.

Several steps are to be taken to issue IPO :

1. Decision by the board & approval from shareholders is first obligation to

issue IPO.

2. Appointment of Lead Manager & other parties connected with public

issues.

3. Preparation of prospectus, the prospectus should not contain any wrong

information in respect of Company. Otherwise it is called as Ultra-vires .

4. Filing prospectus with SEBI & taking approval for issue of prospectus.

5. Printing of prospectus & Share Application form.

6. Dispatch of application forms to brokers & prospective investors.

7. Deciding opening date of issue & Closing date of issue.

8. Receiving application forms.

9. Collecting Application money from banks.

10.Determining basis of allotment & Informing it to Stock exchange there are

three conditions may occur If there is Over-subscription then deciding

basis of allotment; If there is Under-subscription then informing to

underwriters & selling their shares to underwriters.

11.After allotment finalization, giving De-Mat credit to allot tees or sending

share certificates.

12.Listing of Shares on the Stock Exchange.

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Right Issue:

In Right issue Company offers shares to existing shareholders in proportion to

their Paid-up capital. For example, Existing paid-up of company is 10 crores &

company wants to issue shares on right basis for 5 crores. Then every

shareholder, who possesses 2 shares of company will get 1 share(right share).

This offer can be made by company, & it is not mandatory to shareholders to

accept it. A shareholder holds following rights about right issue proposal :

Shareholder can accept it;

Shareholder can reject it ; or

Shareholder can renounce it to someone else. That means he can transfer that

claim to any of his concern person & that person can buy those shares instead of

him.

In Right issue of shares company sends letter of offer along with application form

along with Composite application form contains of following 4 sections :

a. it is for accepting right shares & applying for additional

b. It is to renounce the share. Sec C it is to be filled by the Renounce. Sec D.

It is for split forms. Some portion of shares can purchase by shareholder &

some portion can be renounced.

Private Issue:

This is sale of securities or shares to Specified persons. Because of need of

funds may be more & it may require at short period of time. So this allotment

occurs within limited no. of parties like Financial Institutions, Venture Capitals

Funds, Banks, High net worth Individuals etc.

Private placement of Shares is generally made by unlisted Companies. So all the

issues regarding allotment of shares will be decided by the company. It is just

another like of over the counter exchange. The monitoring institutions will have

less interference in issue of these shares.

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Preference Allotment:

Its issue of Equity shares by listed company to selected investors at

predetermined price. Normally, Preference shares allotment is given to foreign

collaborators or FII ( Foreign Institutional Investors ).

In Preference shares allotment, issue price is to be determined with reference to

quoted price of shares in the last six months. And rules of SEBI are to be

followed regarding preference share allotment. RBI permission is also necessary

when shares are to be allotted to Foreign Collaborators or FII.

7. SECONDARY MARKET

The Secondary Market means a market where all the existing securities

particularly shares are sold & bought on continuous basis. This is huge market &

many stock exchanges conducts crores of rupees from this market. This is the

same market from where all the market participants like Brokers, Sub-brokers,

Mutual Funds, FII ( we have discussed in above table 5.1) deals & invests their

amounts into this market. There are many companies who are listed in any stock

market can be dealt included in this market.

This market is very sensitive market. And any trade or even a single ordinance

passed by the directors of company can cause for deviation in price of shares. In

general sense it is actual Stock market.

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We have discussed various indicators of Secondary Market in following table.

2000-01 2001-02 2002-03Capital

Market

Segment

of

Stock

Exchanges

(Rs. In mn.)

No. of Brokers 9,782 9,687 9,519No. of Listed

Companies

9,954 9,644 9,413

S&P,CNX,

Nifty

1148.20 1129.55 978.20

Market

Capitalisation

7,688,630 7,492,480 6,319,212

Market

Capitalisation

Ratio ( % )

54.5 36.4 28.5

Turnover 28,809,900 8,958,260 9,689,541Turnover Ratio 374.7 119.6 153.3

Turnover

Of

Derivative

segment

of exchanges

(Rs. In mn.)

6,981,241 15,738,930 19,557,313

Turnover

Of

Government

Securities

(Rs. In mn.)

40,180 1,038,480 4,423,333

8. DERIVATIVE MARKET

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Introduction to derivatives

The emergence of the market for derivative products, most notably forwards,

futures and options, can be traced back to the willingness of risk-averse

economic agents to guard themselves against uncertainties arising out of

fluctuations in asset prices. By their very nature, the financial markets are

marked by a very high degree of volatility. Through the use of derivative

products, it is possible to partially or fully transfer price risks by locking-in asset

prices. As instruments of risk management, these generally do not influence the

fluctuations in the underlying asset prices. However, by locking-in asset prices,

derivative products minimize the impact of fluctuations in asset prices on the

profitability and cash flow situation of risk-averse investors.

Derivative products initially emerged, as hedging devices against fluctuations in

commodity prices and commodity-linked derivatives remained the sole form of

such products for almost three hundred years. The financial derivatives came

into spotlight in post-1970 period due to growing instability in the financial

markets. However, since their emergence, these products have become very

popular and by 1990s, they accounted for about two-thirds of total transactions in

derivative products. In recent years, the market for financial derivatives has

grown tremendously both in terms of variety of instruments available, their

complexity and also turnover. In the class of equity derivatives, futures and

options on stock indices have gained more popularity than on individual stocks,

especially among institutional investors, who are major users of index-linked

derivatives.

Even small investors find these useful due to high correlation of the popular

indices with various portfolios and ease of use. The lower costs associated with

index derivatives vis-vis derivative products based on individual securities is

another reason for their growing use.

The following factors have been driving the growth of financial derivatives:

1. Increased volatility in asset prices in financial markets,

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2. Increased integration of national financial markets with the international

markets,

3. Marked improvement in communication facilities and sharp decline in their

costs,

4. Development of more sophisticated risk management tools, providing

economic agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks

and returns over a large number of financial assets, leading to higher

returns, reduced risk as well as trans-actions costs as compared to

individual financial assets.

Types of derivatives

The most commonly used derivatives contracts are forwards, futures and options

which we shall discuss in detail later. Here we take a brief look at various

derivatives contracts that have come to be used.

Forwards: A forward contract is a customized contract between two entities,

where settlement takes place on a specific date in the future at todays pre-

agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell

an asset at a certain time in the future at a certain price. Futures contracts are

special types of forward contracts in the sense that the former are standardized

exchange-traded contracts.

Futures markets were designed to solve the problems that exist in forward

markets. A futures contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. But unlike forward

contracts, the futures contracts are standardized and exchange traded. To

facilitate liquidity in the futures contracts, the exchange specifies certain standard

features of the contract. It is a standardized contract with standard underlying

instrument, a standard quantity and quality of the underlying instrument that can

be delivered, (or which can be used for reference purposes in settlement) and a

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standard timing of such settlement. A futures contract may be offset prior to

maturity by entering into an equal and opposite transaction. More than 99% of

futures transactions are offset this way.

The standardized items in a futures contract are: -

Quantity of the underlying

Quality of the underlying

The date and the month of delivery

The units of price quotation and minimum price change

Location of settlement

Distinction between futures and forwards contracts

Forward contracts are often confused with futures contracts. The confusion is

primarily because both serve essentially the same economic functions of

allocating risk in the presence of future price uncertainty. However futures are a

significant improvement over the forward contracts as they eliminate counter

party risk and offer more liquidity.

Distinction between futures and forward

Futures

Terminology

Spot price: The price at which an asset trades in the spot market.

Futures price: The price at which the futures contract trades in the futures

market.

Contract cycle: The period over which a contract trades. The index futures

contracts on the NSE have one-month, two-months and three-months expiry

cycles, which expire on the last Thursday of the month. Thus a January

Futures ForwardsTrade on an organized

exchange

OTC in nature

Standardized contract terms Customized contract termsHence more liquid Hence less liquidRequires margin payments No margin payment

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expiration contract expires on the last Thursday of January and a February

expiration contract ceases trading on the last Thursday of February. On the

Friday following the last Thursday, a new contract having a three-month

expiry is introduced for trading.

Expiry date: It is the date specified in the futures contract. This is the last day

on which the contract will be traded, at the end of which it will cease to exist.

Contract size: The amount of asset that has to be delivered under one

contract. For in-stance, the contract size on NSEs futures market is 200

Nifties.

Basis: In the context of financial futures, basis can be defined as the futures

price minus the spot price. There will be a different basis for each delivery

month for each contract. In a normal market, basis will be positive. This

reflects that futures prices normally exceed spot prices.

Cost of carry: The relationship between futures prices and spot prices can

be summarized in terms of what is known as the cost of carry. This measures

the storage cost plus the interest that is paid to finance the asset less the

income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at

the time a futures contract is first entered into is known as initial margin.

Marking-to-market: In the futures market, at the end of each trading day, the

margin ac-count is adjusted to reflect the investors gain or loss depending

upon the futures closing price. This is called markingtomarket.

Maintenance margin: This is somewhat lower than the initial margin. This is

set to ensure that the balance in the margin account never becomes negative.

If the balance in the margin account falls below the maintenance margin, the

investor receives a margin call and is expected to top up the margin account

to the initial margin level before trading commences on the next day.

Options: Options are of two types - calls and puts. Calls give the buyer the right

but not the obligation to buy a given quantity of the underlying asset, at a given

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Expiration date: The date specified in the options contract is known as the

expiration date, the exercise date, the strike date or the maturity.

Strike price: The price specified in the options contract is known as the strike

price or the exercise price.

American options: American options are options that can be exercised at

any time upto the expiration date. Most exchange-traded options are

American.

European options: European options are options that can be exercised only

on the expiration date itself. European options are easier to analyze than

American options, and properties of an American option are frequently

deduced from those of its European counterpart.

In-the-money option: An in-the-money (ITM) option is an option that would

lead to a positive cash flow to the holder if it were exercised immediately. A

call option on the index is said to be in the money when the current index

stands at a level higher than the strike price (i.e. spot price > strike price). If

the index is much higher than the strike price, the call is said to be deep ITM.

In the case of a put, the put is ITM if the index is below the strike price.

At-the-money option: An at-the-money (ATM) option is an option that would

lead to zero cash flow if it were exercised immediately. An option on the index

is at-the-money when the current index equals the strike price (i.e. spot price

= strike price)._

Out-of-the-money option: An out-of-the-money (OTM) option is an option

that would lead to a negative cashflow it it were exercised immediately. A call

option on the index is out-of- the-money when the current index stands at a

level which is less than the strike price (i.e. spot price < strike price). If the

index is much lower than the strike price, the call is said to be deep OTM. In

the case of a put, the put is OTM if the index is above the strike price.

Intrinsic value of an option: The option premium can be broken down into

two components - intrinsic value and time value. The intrinsic value of a call is

the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is

zero. Putting it another way, the intrinsic value of a call isNP which means

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the intrinsic value of a call is Max [0, (S t K)] which means the intrinsic value

of a call is the (S t K). Similarly, the intrinsic value of a put is Max [0, (K

-St )] ,i.e. the greater of 0 or (K - S t ). K is the strike price and St is the spot

price.

Time value of an option: The time value of an option is the difference

between its premium and its intrinsic value. A call that is OTM or ATM has

only time value. Usually, the maximum time value exists when the option is

ATM. The longer the time to expiration, the greater is a calls time value, all

else equal. At expiration, a call should have no time value.

Futures Options

Exchange traded, withnovation

Same as futures.

Exchange defines the product Same as futures.Price is zero, strike price

moves

Strike price is fixed, price

moves.Price is zero Price is always positive.Linear payoff Nonlinear payoff.Both long and short at risk Only short at risk.

Swaps: Swaps are private agreements between two parties to exchange cash

flows in the future according to a prearranged formula. They can be regarded as

portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash

flows between the parties in the same currency.

Currency swaps: These entail swapping both principal and interest

between the parties, with the cash flows in one direction being in a different

currency than those in the opposite direction.

A contract between two parties, referred to as counter parties, to exchange two

streams of payments for agreed period of time. The payments, commonly called

legs or sides, are calculated based on the underlying notional using applicable

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rates. Swaps contracts also include other provisional specified by the counter

parties. Swaps are not debt instrument to raise capital, but a tool used for

financial management. Swaps are arranged in many different currencies and

different periods of time. US$ swaps are most common followed by Japanese

yen, sterling and Deutsche marks. The length of past swaps transacted has

ranged from 2 to 25 years.

Why did swaps emerge?

In the late 1970's, the first currency swap was engineered to circumvent the

currency control imposed in the UK. A tax was levied on overseas investments to

discourage capital outflows. Therefore, a British company could not transfer

funds overseas in order to expand its foreign operations without paying sizeable

penalty. Moreover, this British company had to take an additional currency risks

arising from servicing a sterling debt with foreign currency cash flows. To

overcome such a predicament, back-to-back loans were used to exchange debts

in different currencies. For example, a British company wanting to raise capital in

the France would raise the capital in the UK and exchange its obligations with a

French company, which was in a reciprocal position. Though this type of

arrangement was providing relief from existing protections, one could imagine,

the task of locating companies with matching needs was quite difficult in as much

as the cost of such transactions was high. In addition, back-to-back loans

required drafting multiple loan agreements to state respective loan obligations

with clarity. However this type of arrangement lead to development of more

sophisticated swap market of today.

Facilitators

The problem of locating potential counter parties was solved through dealers and

brokers. A swap dealer takes on one side of the transaction as counter party.

Dealers work for investment, commercial or merchant banks. "By positioning the

swap", dealers earn bid-ask spread for the service. In other words, the swap

dealer earns the difference between the amount received from a party and the

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amount paid to the other party. In an ideal situation, the dealer would offset his

risks by matching one step with another to streamline his payments. If the dealer

is a counter party paying fixed rate payments and receiving floating rate

payments, he would prefer to be a counter party receiving fixed payments and

paying floating rate payments in another swap. A perfectly netted position as just

described is not necessary. Dealers have the flexibility to cover their exposure by

matching multiple parties and by using other tools such as futures to cover an

exposed position until the book is complete.

Swap brokers, unlike a dealer do not take on a swap position themselves but

simply locate counter parties with matching needs. Therefore, brokers are free of

any risks involved with the transactions. After the counter parties are located, the

brokers negotiate on behalf of the counter parties to keep the anonymity of the

parties involved. By doing so, if the swap transaction falls through, counter

parties are free of any risks associated with releasing their financial information.

Brokers receive commissions for their services.

Swaps Pricing:

There are four major components of a swap price.

Benchmark price

Liquidity (availability of counter parties to offset the swap).

Transaction cost

Credit risk 1

Swap rates are based on a series of benchmark instruments. They may be

quoted as a spread over the yield on these benchmark instruments or on an

absolute interest rate basis. In the Indian markets the common benchmarks are

MIBOR, 14, 91, 182 & 364 day T-bills, CP rates and PLR rates.

Liquidity, which is function of supply and demand, plays an important role in

swaps pricing. This is also affected by the swap duration. It may be difficult to

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have counter parties for long duration swaps, specially so in India Transaction

costs include the cost of

hedging a swap. Say in case of a bank, which has a floating obligation of 91 day

T. Bill. Now in order to hedge the bank would go long on a 91 day T. Bill. For

doing so the bank must obtain funds. The transaction cost would thus involve

such a difference.

Yield on 91 day T. Bill - 9.5%

Cost of fund (e.g.- Repo rate) 10%

The transaction cost in this case would involve 0.5%

Credit risk must also be built into the swap pricing. Based upon the credit rating

of the counter party a spread would have to be incorporated. Say for e.g. it would

be 0.5% for an AAA rating.

Indian Derivatives Market

Starting from a controlled economy, India has moved towards a world where

prices fluctuate every day. The introduction of risk management instruments in

India gained momentum in the last few years due to liberalization process and

Reserve Bank of Indias (RBI) efforts in creating currency forward market.

Derivatives are an integral part of liberalization process to manage risk. NSE

gauging the market requirements initiated the process of setting up derivative

markets in India. In July 1999, derivatives trading commenced in India

Chronology of instruments

1991 Liberalization process initiated14December

1995

NSE asked SEBI for permission to trade index futures.

18November1996

SEBI setup L.C.Gupta Committee to draft a policy frameworkfor index futures.

11 May 1998 L.C.Gupta Committee submitted report.7 July 1999 RBI gave permission for OTC forward rate agreements

(FRAs) and interest rate swaps.24 May 2000 SIMEX chose Nifty for trading futures and options on an

Indian index.

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25 May 2000 SEBI gave permission to NSE and BSE to do index futures

trading.9 June 2000 Trading of BSE Sensex futures commenced at BSE.12 June 2000 Trading of Nifty futures commenced at NSE.25 September

2000

Nifty futures trading commenced at SGX.

2 June 2001 Individual Stock Options & DerivativesNeed for derivatives in India today

In less than three decades of their coming into vogue, derivatives markets have

become the most important markets in the world. Today, derivatives have

become part and parcel of the day-to-day life for ordinary people in major part of

the world. Until the advent of NSE, the Indian capital market had no access to the

latest trading methods and was using traditional out-dated methods of trading.

There was a huge gap between the investors aspirations of the markets and the

available means of trading. The opening of Indian economy has precipitated the

process of integration of Indias financial markets with the international financial

markets. Introduction of risk management instruments in India has gained

momentum in last few years thanks to Reserve Bank of Indias efforts in allowing

forward contracts, cross currency options etc. which have developed into a very

large market.

1. STOCK EXCHANGE & THEIR TRADING MECHANISM.

Stock exchange is trading house, which provides a platform for trading of

securities. In a stock exchange stocks of various companies are listed for trading.

The stock exchange is also a regulatory board to keep a watch against

manipulation, insider trading, and other such frauds. It gets guidelines from SEBI,

which is the regulating authority for financial securities. Trading in stock

exchanges can be done through the registered brokers.

There are many stock exchanges in the country such as:

National stock exchange (NSE)

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The exchange, while providing an efficient and transparent market for trading in

securities, debt and derivatives upholds the interests of the investor and ensures

redressal of their grievances whether against the companies or its own member-

brokers. It also strives to educate and enlighten the investor by conducting

investor education programmes & making available to them necessary

informative inputs. A governing board having 20 directors is the apex body, which

decides the policies and regulates affairs of exchange. The governing board

consists of 9 elected directors, who are from broking community (one third of

them retired every year by rotation). ,3 SEBI nominees, 6 public representative &

an Executive Director and Chief Executive Officer and a Chief Operative Officer.

BSE key statistics

The Bombay Online

Trading (BOLT)

The BOLT is online trading system in use at the stock exchange, mumbai

(popularly known as BSE, from its original name Bombay Stock Exchange)

since March,1995. it is one of the few stock trading system in the world that

handles hybrid/ mixed modes of trading; both order-driven & code-driven. It

supports the normal segment, the auction segment , Odd Lot segment &

Continuous Net settlement. There are more than 6000 BSE trading terminals

installed across the country.

Brokers sent their quotes, orders , Negotiated deals & in-house deals from their

offices to the Central trading engine (CTE) from their broker work stations. The

top five best bids & their best offers (which is commonly known as Best Bid&

Market Capitalization Rs. 1797428.38 crores

Listed Companies Around 7400Average Daily

Turnover

Rs. 2800 crores

Average Daily

No.Of. Trades

22,249,240

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offer BBO) are available to all broker workstations using a mechanism called

Broadcast of Market Information . the buy & sell orders placed by the brokers /

traders are matched with the best available price in the market for that scrip.

After they are match & transaction concluded, a confirmation sent to broker,

which can be printed out.

LAN of exchange premises

----------------------------------------------------------------------------

Market operations Surveillance Broker Workstations

Workstation Workstation on LAN

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LAN at remote end

----------------------------------------------------

Broker Workstation connected through WAN

THE NATIONAL STOCK EXCHANGE (NSE)

Based on recommendations of a Special Task Force made up of a panel of

leading financial institutions , NSE was promoted by leading financial institutions

at behest of Govt. of India and was incorporated in November,1992 as a tax

paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act,1956 in April,1993, NSE commenced operations in wholesale

debt market (WDM) segment in June, 1994. the Capital market (Equities)

segment commenced operations in November,1994 & operations in Derivatives

Segments commenced in june,2000.

The NSE operates through a network through a very small Aperture Terminals or

VSATs. Its counterpart to BSEs BOLT trading system is the NSEs Internet

Based Information System or NIBIS.

NSE key statistics

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Number of VSATs 2,289Number of Cities covered 345Market Capitalization (in Rs. crores) 17,42,748Listed Securities 1,347Average Daily Turnover (in Rs.

crores)

10,466,552

Average Daily No. of Trades 28,50,998

2. LEGAL & REGULATORY & LEGAL FRAME WORK

Capital Issues (Control) Act,1947:-

The act has its origin during the war of 1943 when the objective was to channel

the resources to support the war effort. It was retained with some modifications

as a means of controlling the raising of capital by companies and to ensure

national resources were channeled into proper lines, i.e. for desirable purposes

to serve goals 7 priorities of the government & to protect the interest of investors.

Under the Act, any firm wishing to issue securities had to obtain approval from

the Central Government, which also determined the amount, type & price of the

issue. As a part of the Liberalization process, the act was repealed in 1992paving way for market-determined allocation of resources.

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The Securities Contracts & Regulations Act, 1956

It provides direct & indirect control of virtually all aspects of securities trading &

running stock exchanges and aims to prevent undesirable transactions in

securities. It gives regulatory jurisdiction over (a) stock exchanges through aprocess of recognition & continued supervision, (b) contracts in securities, (c)

listings of securities on stock exchanges. As a condition of recognition a stock

exchange complies with the conditions prescribed by the Central government.

The stock exchanges determine their own listing regulations on which have to

confirm to minimum listing criteria set out in the rules.

The Companies Act, 1956 :-

This Act was passed to monitor the activities of companies. This Act is very

important because it contains some crucial informations pertaining to

Shares , which is key tool in stock market, application ,allotment & call

procedures, types of shares, dividends, transfer of shares etc. It contains very

crucial issues of company. In Concise, this act is Magna-Charta of

Companies activities.

Following are some of the important sections of this act:

Section 86 this section explains types of shares, i.e. Preference & Equity

shares. Their dividends & voting rights.

Section 85 states & explains about the preference shares, their status, voting

& rate of dividend.

Section 108 this section says that a company shall register transfer of shares

in, debentures of, company if a proper instrument of transfer duly stamped &

executed on behalf of transferor or on behalf of transferee , specifying name

& address of the same party.

Section 205 Dividend

Section 205C Investor Education & Protection

Section 159 &160

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SEBI Act,1992 :-

Major part of liberalization process was the repeal of the Capital Issues (Control)

Act, 1947., in May,1992. With this, Governments control over issues of

capital, pricing of the issues, fixing of premium & rates of interests on

debentures etc. ceased, & the office which administered the act was

abolished: the market was allowed to allocate the resources to competing

uses. However, to ensure effective regulation of the market, SEBI Act,

1992 was enacted to establish SEBI with statutory powers for:

Protecting interests of investors in securities

Promoting the development of securities market, and

Regulating the securities market.

Constitution of SEBI: -

The Central Government has constituted a board by the name of SEBI under

section 3 of SEBI Act. The head office of SEBI is in mumbai.

SEBI consists of following members only;a) A chairman;

b) Two members amongst the officials of ministries of central government

dealing with finance & administration of companies act, 1956;

c) One member amongst the officials of reserve bank of India;

d) Five other members of whom at least three shall be whole time members

to be appointed by central government.

The general superintendence, direction and management of the affairs of SEBI

vests in board of directors, which exercises all powers and all acts and things

which may be exercised or done by SEBI.

Functions of SEBI:

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SEBI has been obligated to protect the interest of investors in securities and to

promote & development of, & to regulate securities market by such measures as

it thinks fits. The measures referred to therein may provide for: -

A. Regulating the business in stock exchanges and any other regulated

market;

B. Registering and regulating the working of stock brokers, sub brokers,

share transfer agent, bankers to an issue, trustees of trust deeds,

underwriters, portfolio managers, merchant bankers, registrar to an

issue, and such other intermediaries who may be associated with in

securities market in any manner;

C. Registering and regulating the working of depositories, participants,

custodians of securities, foreign institutional investors, credit rating

agencies and such other intermediaries as SEBI may, by notification,

specify in this behalf;

D. Registering and regulating the working of venture capital funds and

collective investment schemes including mutual funds;

E. Promoting and regulating self regulatory organizations;

F. Prohibiting fraudulent trade practices in securities market;

G. Promoting investors education and training of intermediaries of

securities market;

H. Prohibiting insider trading in securities.

I. Regulating substantial acquisition of shares and take over of

companies;

J. Calling for information from undertaking inspection, conducting

inquires and audits of stock exchange, mutual funds, other persons

associated with securities markets, intermediaries, and self regulatory

organization in securities market;

K. Calling for information and record from any bank or any other authority

or board or corporation established or constituted by or under any

central, state or provincial act in respect of any transaction in securities

which is under investigation or inquiry by the Board;

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L. Performing such functions and exercising according to securities

contracts act, 1956, as may be delegated to it by central government;

M. Levying fees or other charges for carrying out the purpose of this

section;

N. Conducting research for above purposes;

O. Calling from or furnishing to any such agencies, as may be specified by

SEBI, such information as may be considered necessary by it for

efficient discharge of its functions;

P. Performed such other functions as may be prescribed;

Registration of Intermediaries

The intermediaries and the person associated with securities market shall buy,

sell, ordeal in securities after obtaining a certificate of registration from SEBI, as

required by section 12;

1. Stock-broker,

2. Sub-broker,

3. Share Transfer Agents,

4. Bankers To An Issue,

5. Trustee Of Trust Deed,

6. Registrar To An Issue,

7. Merchant Banker,

8. Underwriter,

9. Portfolio Manager,

10.Investment Advisor,

11.Depository,

12.Depositary Participant,

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13.Custodian Of Securities,

14.Foreign Institutional Investor,

15.Credit Rating Agencies,

16.Venture Capital Funds,

17.Mutual Funds,

18.Custodian Of Securities,

19.Any Other Intermediary Associated With Securities Market.

The Depositories Act,1996 :-

The Depositories Act 1996 was enacted to provide for regulation of Depositories

in the securities & for matters connected therewith or incidental thereto. It came

into force from 20th September 1995. The following terms are defined under this

law:

Beneficial owner means a person whose name is recorded as such with a

Depository.

Depository means a company, formed & registered under the Companies Act,

1956 & which has been granted a certificate of registration under sub-section

(1A) of section 12 of SEBI Act, 1992.

Issuer means any person making an issue of securities.

Participant means a person registered as such under sub-section (1A) of

section 12 of SEBI Act, 1992.

Registered owner means a depository whose name is entered as such in the

name of register of the issuer.

This law also consists of following vital issues:

1. Agreement between depository & participant: -

A Depository shall enter in the specified format with one or more participants as

its agents.

2. Services of Depository: - Any person, through a participant, may enter into

agreement, in such form as may be specified by the bye-laws, with any

depository for availing its services.

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Surrender of certificates: - Any person who has entered into agreement with a

depository shall surrender the certificate of Security, for which he seeks to

avail the services of depository, to the issuer in such manner as may be

specified by the regulation.

Registration of transfer of securities with depository: - Every depository shall,

on receipt of intimation from a participant, register the transfer of security

in the name of transferee. If the beneficial owner or a transferee of any

security seeks to have custody of such security, the depository shall

inform the issuer accordingly.

Securities in Depositories to be in fungible form: - All securities held by

depository shall be kept in fungible & dematerialized form.

Rights of Depositories & beneficial owner: - A Depository shall deemed to be

registered owner for the purposes of effecting transfer of ownership of

security on behalf of beneficial owner. The beneficial owner shall be

entitled to all the rights & benefits & subjected all the liabilities in respect of

his securities held by depository.

Furnishing of information & records by depository: - Every depository shall

furnish to the issuer information about the transfer of securities in the

name of beneficial owners at such intervals & in such manner as specified

by byelaws.

Depository to indemnify loss in certain cases.:- Any loss caused due to the

negligence of the depository or the participant , the depository shall

indemnify such beneficial owner.

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1.BROKER-CLIENT RELATIONSHIP.Acts Sections Powers Exercisable BySecurities

Contracts

(Regulation)

Act, 1956.

6

9

10

13A

17

Call for periodical return or direct

enquiries to be made.

Approval of byelaws of recognized

stock exchanges.

Make or amend bye-laws of

recognized stock exchanges.

Additional trading floor.

Licensing of Dealers in securities.

SEBI

16 To prohibit contracts in certain

cases.

Central government &

concurrently exercised by

SEBI and RBI.

22A Appeal against refusal by stock

exchanges.

SAT

All other powers under the act Central government (DEA)Securities contracts rules,1992 SEBIRules regulation and by laws. Stock exchanges.

SEBI Act,

1992

3,4,5 & 6 15K to

15Q

16

17

18

29

Establishment of SEBI

Establishment of sat

To issue directors

To supersede SEBI

SEBI to submit returns & reports, to

make rules.

Central government (DEA)

15T Appellate powers SATAll other powers. SEBI

Depository

Act,1996

24 To makes rules Central government (DEA)23 Appellate powers SAT26 To make bylaws Depositories.All other powers. SEBI

Companies

Act,1956

55 to 58, 59 to

84, 108 to 110,

112, 113, 116 to

122, 206, 206A,

207.

Issue of securities, transfers of

securities, and nonpayment of

dividend in case of listed public

companies in case of those public

companies which intend to get their

securities listed on any recognized

stock exchange in India.

SEBI

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account shall be used for FII s (where FII itself is the investing entity) and their

sub-accounts, and the unique registration number issued by the relevant

regulatory authority shall be used for tax paying body corporate and non-tax

paying entities. SEBI registration number followed by any number given by

mutual fund to denote Scheme/Plan shall be used for mutual funds.

Brokers shall verify the documents with respect to the unique code and retain

a copy of the document. They shall also be required to furnish the above

particulars of their clients to the stock exchanges/clearing corporations and

the same would be updated every quarter. The stock exchanges shall be

required to maintain a database of client details submitted by brokers. Historical

records of all quarterly submissions shall be maintained for a period of seven

years by the exchanges. The above requirement shall be applicable for clients

having order value of Rs.1 lakh or more and shall be enforced with effect from

August 01, 2001 (SEBI Circular SMDEP/Policy/Cir-39/2001 Dated July 18,

2001 and MFD/Or No. 8/290/01 Dated June 30, 2001).

Margins from the Clients

It shall be mandatory for the TM to collect upfront margins from clients

whose trades would result in a margin of Rs. 50,000/- or more, ( refer to SEBIcircular no. SMD/POlJCY/Or-12/2002 dated 17 May 2002 ). The margin so

collected shall be kept separately in the client bank account and utilized for

making payment to the clearinghouse for margin and settlement with respect

to that client.

Execution of Orders

The TM shall ensure that appropriate confirmed order instructions are

obtained from the clients before placement of an order on the system. In

order to execute a trade for a client, a broker must have specific customer

instructions as to name of the company, the precise number of shares and

limit/market price condition. Where the client requires an order to be placed

or any of his orders to be modified after the order has been entered in the

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system but has not been traded, the TM shall ensure that he obtains order

placement/modification details in writing from the client. The TM shall make

available to his client the order number and copies of the order confirmation

slip/modification slip/cancellation slip and a copy of the trade confirmation

slip as generated on the trading system, forthwith on execution of the trade.

The TM shall maintain copies of all instructions in writing from clients

including participants for an order placement, order modification, order

cancellation, trade cancellation etc.

Accumulation of orders

The TM shall not accumulate client's order/unexecuted balances of order

where such aggregate orders/aggregate of unexecuted balance is greaterthan the regular lot size, specified for that security by the Exchange. The

TM shall place forthwith all the accumulated orders where they exceed the

regular lot size. Where the TM has accumulated the orders of several

clients to meet the requirement of the regular lot quantity, he may give his

own order number referred to as the Reference Number, together with a

reference number to the NEAT Order Number, to the client.

Contract Note

Contract note is a confirmation of trade(s) done on a particular day for and

on behalf of a client. A stock-broker shall issue a contract note to his clients

for trades (purchase/sale of securities) executed with all relevant details as

required therein to be filled in (refer to SEBI circular no. SMD/SED/CIR/23321

dated November 18, 1993). A contract note shall be issued to a client within

24 hours of the execution of the contract duly signed by the TM or his

Authorized Signatory or Client Attorney. The contract note should contain name& address (registered office address as well as dealing office address) of the TM, The

SEBI registration number of the TM , details of trade viz. order number, trade number,

security name, trade time, brokerage, settlement number & details of other levies. The

Contract note must contain the clause Client will hold the security blank at its own risk.

The TM shall ensure that

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i. Contracts notes are in prescribed format,

ii. Maintain details in the counterfoils of contract notes,

iii. Stamp duty is paid

iv. The service tax charged in bill is shown separately and

v. An authorized signatory TM signs by the TM or contract notes.

The Contract note should be issued by broker/ TM within 24 hours of trade conducted

within parties.

Segregation of Bank accounts

The trading member should maintain separate bank accounts for clients funds

& own funds. It shall be compulsory for all TM to keep money of their clients in

separate accounts & their own money in separate accounts. Funds shall

transferred from the client account to the clearing account for the purpose of

funds pay-in obligations on behalf of the clients and vice-versa in case of

funds pay-out. No payment for transaction in which the TM is taking position as

a principal will be allowed to be made from the client's account.

Sub-Broker - Client Relations

Know Your Client

The sub-broker shall enter into an agreement with the client before placing

orders. Such agreement shall include provisions specified by the exchange in

this behalf. The said agreement shall be executed on non-judicial stamp

paper. The client should provide information to the sub-broker in the

'Client Registration Application Form'.

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Orders

The sub-broker shall ensure that appropriate confirmed order instructions are

obtained from the clients before placement of an order on the system and

shall keep relevant records or documents of the same and of the

complet ion or otherwise of these orders thereof.

Purchase/Sale Note

The purchase/sale note shall include the TM's name, address, identity

number, contract note number, date and other details contained in the format

prescribed by the Exchange. The purchase/sale note issued by the sub-broker

shall bear a unique purchase/sale note number & date, place of issue which

shall be the place of business of the sub-broker, and shall be stamped by the

sub-broker as required under the relevant central/state stamp legislations.

The purchase/sale note shall specify the break-up of the brokerage payable

to the TM and to the sub-broker. The Sub-broker shall provide a

purchase/sale note for all transactions made within 24 hours of the execution

of the contract. The sub-broker shall ensure that -

The sub-broker pays stamp duty.

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