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Business Environment Chapter 07 Stock Exchanges inIndia

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Chapter 07

Stock Exchanges inIndia


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CONCEPT AND MEANING OF STOCK EXCHANGE

Stock exchange is an organised marketplace, either corporation or

mutual organisation, where members of the organisation gather to tradecompany stocks or other securities.

The members may act either as agents for their customers, or asprincipals for their own accounts.

It is a place where securities are featured by the centralisation of supply

and demand for the transaction of orders by member brokers forinstitutional and individual investors.

It is established to facilitate the buying and selling of stocks.

Stock exchanges facilitate the issue and redemption of securities andother financial instruments, including the payment of income and

dividends. Trading is linked to such a physical place because modern markets are

computerised.

Trading on an exchange is only by members and stockbrokers do havea seat on the exchange.


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LIST OF STOCK EXCHANGES IN INDIA

Bombay Stock Exchange Regional Stock Exchanges

National Stock Exchange

Ahmedabad Stock Exchange

Bangalore Stock Exchange

Bhubaneshwar StockExchange

Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange

Delhi Stock Exchange

Guwahati Stock Exchange Hyderabad Stock Exchange

Jaipur Stock Exchange

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


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TYPES OF FINANCIAL MARKETS

The financial markets can be broadly divided into money market andcapital market:

Money Market

Money market is a market for debt securities that pay off in the shortterm usually less than one year.

Money market encompasses the trading and issuance of short-termnon-equity debt instruments, including treasury bills, commercialpapers, bankers acceptance, certificates of deposits, and so on.

Capital Market

Capital market is a market for long-term debt and equity shares.

In Capital market the capital funds comprising of both equity and debtare issued and traded.

Capital market can be further divided into primary and secondarymarkets.


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Secondary Market

Secondary market refers to a market where securities are traded afterbeing initially offered to the public in the primary market, and/or listed onthe stock exchange.

Secondary market comprises of equity markets and the debt markets.

Secondary market provides an efficient platform for trading of hissecurities.

Difference between Primary Market andS

econdary Market In the primary market, securities are offered to public for subscription,

for the purpose of raising capital or fund.

Whereas, the secondary market is an equity-trading avenue in whichthe already existing/pre-issued securities are traded among investors.

The secondary market could be either auction or dealer market. Whilestock exchange is the part of an auction market, over-the counter (OTC)is a part of the dealer market.


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SEBI AND ITS ROLE IN THE SECONDARY MARKET

Security Exchange Board of India (SEBI)

The SEBI is the regulatory authority established under Section 3 of

SEBI Act, 1992, to protect the interests of the investors in securities and

to promote the development of, and to regulate, the securities market

and for matters connected, therewith, and incidental, thereto.

Role of SEBI in Regulating Trading in the Secondary Market


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Business Environment Chapter 07 Stock Exchanges inIndia 7

The following departments of SEBI take care of theactivities in the secondary market:


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PRODUCTS AVAILABLE IN THE SECONDARY MARKET

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

Equity Shares

An equity share commonly referred to as an ordinary share, alsorepresents the form of fractional ownership in which a shareholder,as a fractional owner, undertakes the maximum entrepreneurial riskassociated with a business venture.

The holders of such shares are members of the company and havevoting rights.

A company may issue such shares with differential rights as tovoting, payment of dividend, and so on.

The various kinds of equity shares are as follows:

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

Bonus Shares: The shares issued by the companies to theirshareholders, free of cost, by capitalisation of accumulated reservesfrom the profits earned in the earlier years.


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Preferred Stock/Preference Shares

The owners of these kinds of shares are entitled to a fixed dividend or adividend calculated at a fixed rate to be paid regularly before a

dividend can be paid in respect of an equity share.Preference shares enjoy priority over the equity shareholders in

payment of a surplus. But in the event of liquidation, their claimsrank below the claims of the companys creditors, bondholders, ordebenture holders.

Cumulative Preference Shares: A type of preference shares on

which dividend accumulates, if remains unpaid. All arrears ofpreference dividend have to be paid out before paying dividend onthe equity shares.

Cumulative Convertible Preference Shares: A type of preferenceshares where the dividend payable on the same accumulates, if notpaid. Aft er a specified date, these shares will be converted as theequity capital of the company.

Participating Preference Share: The right of certain preferenceshareholders to participate in profits after a specified fixed dividendthat was contracted for is paid. Participation right is linked with thequantum of dividend paid on the equity shares, over and above aparticular specified level.


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Security Receipts

Security receipt means a receipt or other security, issued by a

securitisation or a reconstruction company to any qualifiedinstitutional buyer pursuant to a scheme, evidencing the purchase oracquisition by the holder thereof, of an undivided right, title, orinterest in the financial asset involved in securitisation.

Government Securities (G-Secs):

These are sovereign (credit risk-free) coupon-bearing instruments,which are issued by the Reserve Bank of India (RBI) on behalf ofGovernment of India, in lieu of the Central governments market-borrowing programme.

These securities have a fixed coupon that is paid on specifi c dateson half-yearly basis.

These securities are available in a wide range of maturity dates,from short dated (less than one year) to long dated (up to 20 years).


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DEBENTURESBonds issued by a company, bearing a fixed rate of interest, usually payable

half-yearly on specific dates, and principal amount repayable on a particular

date on redemption of the debentures. Debentures are normallysecured/charged against the asset of the company in favour of a debentureholder.

Bond:

A negotiable certificate evidencing indebtedness. It is normally unsecured.A debt security is generally issued by a company, a municipality, or agovernment agency.

A bond investor lends money to the issuer and, in exchange, the issuerpromises to repay the loan amount on a specified maturity date.

Zero Coupon Bond:

Bond issued at a discount and repaid at a face value. No periodic interest ispaid.

The difference between the issue price and redemption price represents thereturn to the holder.

The buyer of these bonds receives only one payment, at the maturity of thebond.

Convertible Bond:

A bond giving the investor the option to convert the bond into equity at afixed conversion price.


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COMMERCIAL PAPER

A short-term promise to repay a fixed amount that is placed on the

market, either directly or through a specialised intermediary.

It is usually issued by companies with a high credit, standing in theform of a promissory note, redeemable at par to the holder onmaturity and, therefore, does not require any guarantee.

Commercial paper is a money market instrument issued normally fortenure of 90 days.

Treasury Bills:

Short-term (up to 91 days) bearer discount security issued by thegovernment as a means of financing its cash requirements.


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BROKER AND SUB-BROKER IN THE SECONDARY

MARKET

Broker

A broker is a member of a recognised stock exchange, who ispermitted to do trades on the screen-based trading system ofdifferent stock exchanges. He is enrolled as a member with the

concerned exchange and is registered with SEBI.

Sub-broker

A sub-broker is a person who is registered with SEBI as such and isaffiliated to a member of a recognised stock exchange. You can

contact a broker or a sub-broker registered with SEBI for carryingout your transactions pertaining to the capital market.


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SEBI RISK MANAGEMENT

SYSTEM1. VAR-based margining system.2. Specifi cation of mark-to-market margins

3. Specifi cation of intra-day trading limits and gross exposure limits

4. Real-time monitoring of the intra-day trading limits and grossexposure limits by the stock exchanges

5. Specifi cation of time limits for payment of margins6. Collection of margins on T+1 basis

7. Index-based market-wide circuit breakers

8. Automatic de-activation of trading terminals, in case of breach ofexposure limits

9. VAR-based margining system has been put in place, based on thecategorisation of stocks, which, in turn, based on the liquidity ofstocks, depending on its impact on cost and volatility. It addresses99 per cent of the risks in the market.

10. Additional margins have also been specifi ed to address thebalance 1 per cent cases.


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INVESTOR PROTECTION FUND (IPF)/CUSTOMER

PROTECTION FUND (CPF) AT STOCK EXCHANGES

Investor Protection Fund (IPF) is the fund set up by the stock

exchanges, to meet the legitimate investment claims of the clients,

of the defaulting members who are not of speculative nature.

SEBI has prescribed guidelines for the utilisation of IPF at the stockexchanges.

The stock exchanges have been permitted to fix suitable

compensation limits, in consultation with the IPF/CPF Trust.


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Acts Governing Securities Transactions in India

In India, two Acts mainly govern securities transactions at present.

They are as follows:

1. The Securities Contracts (Regulation) Act, 1956 and

2. The Securities & Exchange Board of India Act, 1992.

The other relevant laws, which affect the capital market are:

1. Th e Depositories Act, 1996

2. Th e Foreign Exchange Regulations Act, 19733. Arbitration and Conciliation Act, 1996

4. Companies Act, 1956

5. Debt Recovery Act (Bank and Financial Institutions Recovery of

Dues Act, 1993)

6. Banking Regulation Act

7. Benami Prohibition Act

8. Indian Penal Code

9. Indian Evidence Act, 1872, and

10. Indian Telegraph Act, 1885.


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FOREIGN INSTITUTIONAL INVESTORS (FIIS)

Foreign Institutional Investors (FIIs) including institutions such as

pension funds, mutual funds, investment trusts, asset management, or

their power of attorney holders (providing discretionary and non-

discretionary portfolio management services), are invited to invest in all

the securities traded on the primary and secondary markets, including

the equity and other securities/instruments of companies, which are

listed/to be listed on the stock exchanges in Indiaincluding the OTCExchange of India.

These would include shares, debentures, warrants, and the schemes

floated by domestic mutual funds. To be eligible to do so, the FIIs would

be required to obtain registration with Securities and Exchange Board of

India (SEBI).

FIIs are also required to file with SEBI and another application

addressed to RBI, for seeking various permissions under FERA.


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FUNCTIONS OF SECURITY EXCHANGE BOARD OFINDIA

Subject to the provisions of this Act, it shall be the duty of the Boardto protect the interests of the investors in securities and to promotethe development of, and to regulate, the securities market, by suchmeasures as it thinks fit;

Regulating the business in stock exchanges and any other

securities markets; Registering and regulating the working of stockbrokers, sub-brokers,

share-transfer agents, bankers to an issue, trustees of trust deeds,registrars to an issue, merchant bankers, underwriters, portfoliomanagers, investment advisors, and such other intermediaries whomay be associated with securities markets, in any manner;

Registering and regulating the working of the depositories,participants, custodians of securities, FIIs, credit-rating agencies,and such other intermediaries as the Board may, by notification,specify in this behalf;


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Registering and regulating the working of venture capital funds andcollective investment schemes, including mutual funds;

Promoting and regulating self-regulatory organisations;

Prohibiting fraudulent and unfair trade practices relating to securitiesmarkets;

Promoting investors education and training of intermediaries ofsecurities markets;

Prohibiting insider trading in securities;

Regulating substantial acquisition of shares and takeover ofcompanies;

Can call for any information from, undertaking inspection,conducting enquiries and audits of the stock exchanges, mutualfunds, other persons associated with the securities market,intermediaries, and self-regulatory organisations in the securitiesmarket;

Can call for any information and any 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 anytransaction in securities, which is under investigation or enquiry bythe Board;


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POWERS OF SECURITY EXCHANGE

BOARD OF INDIA


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GROWTH OF STOCK MARKET IN INDIA

The Indian stock market has emerged as one of the worstperformers globally in the first three months this calendar year, with

concerns of a possible slowdown in the US economy and a surge incommodity prices, impacting sentiments of emerging and developedequity markets, a report says.

According to a monthly review by global index provider Standardand Poor, or S&P, the worlds emerging and developed equitymarkets were hit hard during the first quarter of 2008, losing 10.56

per cent and 8.95 per cent, respectively, during the period. Near-record commodity prices, 10-year US treasury rates approachingtheir lowest level, a struggling dollar and the potential global impactof a perceived US recession all fuelled market volatility anduncertainty during the first quarter.

Among the emerging world equity markets, 15 of the 26 countries

lost ground during the JanuaryMarch quarter this year, with India,China, and Turkey emerging as the worst performers.

During the first three months in 2008, Indian equity market lost 28.55per cent, while China and Turkey witnessed a fall of 24.65 per centand 36.62 per cent, respectively.


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