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Project Report On Capital Market
Project Report On Capital Market
Project Report On Capital Market
ON
CAPITAL
MARKET
SUBMITTED TO:
SUBMITTED BY:
POOJA M. KOHLI
NEZAMUDDIN
EXECUTIVE DIRECTOR
MBA(IC) 2nd YEAR
LUDHIANA STOCK EXCHANGE
ROLL NO: 629
ACKNOWLEDGEMENT
Nezamuddin
PREFACE
The successful completion of this project was a unique experience for me
because by visiting many place and interacting various person, I achieved a
better knowledge about this project. The experience which I gained by doing
this project was essential at this turning point of my carrier this project is
being submitted which content detailed analyst of the research under taken
by me.
The research provides an opportunity to the student to devote her skills
knowledge and competencies required during the technical session.
The research is on the topic capital market
Contents
Organization of LSE
Management of LSE
Strengths of LSE
Investors related services
Educational initiatives of exchange
Listing of securities of companies at LSE
CAPITAL MARKET
STOCK EXCHANGE
LEGAL FRAMEWORK
SEBI(intermediaries) Regulation,2008
SEBI Regulations, 1992
Organization
1. OBJECTIVES OF THE COMPANY
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange,
which was formed with an objective to enhance business and investment
opportunities for the investors and members of Ludhiana Stock Exchange at
large, through innovative products by encompassing a variety of activities
related to the capital market. The company has a paid-up capital of Rs 5.55
crores.
2. INTRODUCTION OF THE LSE SECURITIES LTD.
LSE Securities Ltd., was incorporated in January, 2000 with a view to revive
the capital market in the region and for taking full advantage of the
emerging opportunities being provided by expansion of bigger stock
exchanges like NSE and BSE. The company since its inception has marched
forward rapidly and achieved many milestones in a short span of existence.
3. GOVERNING COUNCIL
The Council of the management of the Company comprises of 10 directors
of which 3are broker members and 7non-brokers. Five non broker members
are Independent Directors of eminent status from the field of finance, law
and management and remaining two are Chief Executive Officer of LSE
Securities Limited and Executive Director of the holding company (Ludhiana
Stock Exchange), who are on the Board of the company as ex-officio
Directors. Thus the council of management has representation of subbrokers as well as professionals and subject specialists representing various
fields of business activities. Operations of the company are run in a
professional, transparent and fair manner keeping in view of the interest of
investors as well as other stake-holders.
4. CORPORATE MEMBERSHIP OF NSE & BSE
SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade
on bigger Stock Exchanges through their subsidiary companies. The
Ludhiana Stock Exchange floated its subsidiary company, the LSE Securities
Limited, with the objective of obtaining trading rights on bigger Stock
Exchanges. It has obtained corporate membership of both NSE and BSE in
the first half of year 2000.
5. TRADING AT NSE AND BSE
The LSE Securities Ltd. commenced trading operations in Capital Market
Segments of BSE and NSE in September, 2000 and December 2000
respectively. The turnover of the Company at NSE and BSE is growing by
leaps and bounds ever since in incorporation. There was encouraging
response from the sub-brokers specially at NSE counters.During the
Management
The management of the Company comprises of 12 directors of which 5 are
member directors and 5 Public Representatives being persons of eminent
status from the field of finance, law and management, who are nominated
by Ludhiana Stock Exchange after approval of their name from SEBI.
Besides the Chief Executive Officer of company and Executive Director of
the holding company (Ludhiana Stock Exchange) are on the Board of the
company as ex-officio Directors. Operations of the company are run in a
professional, transparent and fair manner keeping in view the interest of
investors as well as other stake-holders.
STRENGTHS OF LSE
CAPITAL MARKETS
Introduction:
Markets exist to facilitate the purchase and sale of goods and services. The
financial market exists to facilitate sale and purchase of financial
instruments and comprises of two major markets, namely the capital
market and the money market. The distinction between capital market and
money market is that capital market mainly deals in medium and long-term
investments (maturity more than a year) while the money market deals in
short term investments (maturity upto a year).
Capital market can be divided into two segments viz. primary and
secondary. The primary market is mainly used by issuers for raising fresh
capital from the investors by making initial public offers or rights issues or
offers for sale of equity or debt. The secondary market provides liquidity to
these instruments, through trading and settlement on the stock exchanges.
Capital market is, thus, important for raising funds for capital formation and
investments and forms a very vital link for economic development of any
country. The capital market provides a means for issuers to raise capital
from investors (who have surplus money available from saving for
investment). Thus, the savings normally flow from household sector to
business or
Government sector, which normally invest more than they save.
A vibrant and efficient capital market is the most important parameter for
evaluating health of any economy.
Definition
Capital markets provide a wide range of products and services that are
related to financial investments. Capital markets include the stock market,
commodities exchanges, the bond market, and just about any physical or
virtual service or intermediary where debt and equity securities can be
bought or sold. Their primary purpose is to raise funds and channel
investors money to areas where there is a deficit or need for investment.
They play a vital role as intermediaries between governments and
companies, which use them to finance a myriad of activities.
The capital markets can be broken down into the primary market, where
new stocks and bonds are issued to investors, and the secondary market,
geographical boundaries.
The story of Capital Markets in India dates back to the 18 th century when
trading shares of East India commenced. The real story of Indias Capital
Markets started in July 1875 with the formation of Stock Exchange in
Mumbai by the brokers. Indias Capital Market in terms of GDP raised from
75 percent in 1995 to 130 percent of GDP in 2005. But the relative growth
compared to US, Malaysia and South Korea remains low, indicating
immense untapped potential.
Advantages:
Disadvantages:
Prices for shares in capital markets can be very volatile. Their value
depends on a number of external factors over which the investor has
no control.
with
the
that are essential for rapid industrialization. The Savings and investment
ratios are too low, below 10% of GDP.
Encourages broader ownership of productive assets by small savers
to enable them benefit from Kenyas economic growth and wealth
distribution. Equitable distribution of wealth is a key indicator of poverty
reduction.
Promotes public-private sector partnerships to encourage
participation of private sector in productive investments. Pursuit of economic
efficiency shifting driving force of economic development from public to
private sector to enhance economic productivity has become inevitable as
resources continue to diminish.
Assists the Government to close resource gap, and complement its effort in
financing essential socio-economic development, through raising long-term
project based capital.
Improves the efficiency of capital allocation through competitive
pricing mechanism for better utilization of scarce resources for increased
economic
growth.
Provides a gateway to Kenya for global and foreign portfolio investors, which
is critical in supplementing the low domestic saving ratio.
Market
for
the
Economic
Capital Market is a channel through which the wealth of savers are put into
long-term productive use. Both the Equity and Bond markets are parts of
Capital Markets. Governments and Companies use Capital Markets to raise
money for their long-term investments. The capital is raised through debt
and equity instruments. Capital Markets are of two types: Primary market is a
market for new shares and secondary market is a market for trading existing
securities.
Greater homeownership
Conclusion
If one looks into history and traces back the reasons for flourishing of
economies such as Dutch and United Kingdom the reasons for the success of
these economies lies in piping the public saving in to long-term investments.
The Dutch were the first to procure funds from public; they raised capital to
trade and maintain battle ships in order to protect their ships from the
pirates. British had replicated the Dutch financial system and became an
Empire and eventually the countries that replicated good Capital Market
practices, like United States, also flourished.
The Capital Markets play a significant role in any economy from allocation of
Capital and Risk to Policy Making. If there is any single factor that makes a
huge impact in improving the GDP of a country, it is the effective allocation
of capital to the Industry and Government. Capital Market is the best channel
to route the savings into long-term productive use. If we look in to the
economy and find the enterprises that were hit by high cost of capital, one
can observe that MSME that provides highest number of employment
opportunities were worst hit by it. If a country develops and adopts best
Capital Market practices they create multiple effects and helps in reviving
the economy. The SME Exchange is a welcome move for the Small and
Medium Scale Enterprises, but it is alone not enough to revive MSME.
Capital market is the heart of any economy through which the savings are
channelized into effective long-term investments. A developed and vibrant
Capital Market will immensely contribute towards speedy economic growth
and development.
The specificity of this market derives from numerous aspects, but defining
and at the same time delimitative in relation to other components of the
financial market are the following traits:
It is a market specialized in transactions with medium and long term
financial assets, unlike the monetary market which offers solutions for
refinancing through short and medium term capitals;
It is a public, open and transparent market, in the sense that anyone can
be a participant on this market, without there being notable entry or exit
barriers, the transactions having a public character;
The dissemination of information on this market, through its volume or,
quickness and with the possibility of equal reception by all participants, is
probably the best one from the ones existing in the structures of a market
economy;
The capital circulation vehicle is represented by securities, characterized
through negotiability of the price and immediate transferability with very low
transaction costs;
The transaction is made through intermediaries, who have an essential
role in connecting the owners or issuers of securities with the owners of
capitals;
It entails risks both for the issuer and for the investor, specific for each
financial instrument in question, but at the same time it also offers complex
solutions for minimizing and dispersing it, both the financial and the
operational one;
It is an organized market, in the sense that the transactions are
performed according to certain principles, norms and rules known and
accepted by participants. This does not mean the administration of the
market, but its regulation with the purpose of creating or preserving the
conditions for the unfolding of free competition, so a system for
guaranteeing the free and open character of all transactions.
In a market economy, the role of the capital market is of first rate. The well
functioning of the capital market is vital in the contemporary economy in
order to be able to perform an efficient transfer of money resources from
those who save towards those who need capital and those who succeed to
offer it a higher capitalization; the capital market can significantly influence
the quality of the investment decisions.
Depending on the moment when the transaction is performed, the capital
market is divided into two temporal dependant segments: primary and
secondary.
The primary market has the role of placing the issuing of securities, to attract
the available financial capitals on medium and long term, both on the
internal capital markets, and on the international one appealing to the public
economies.
The secondary market once the securities are set into circulation, through
the issuance on the primary market, they are the object of transactions on
the secondary market. The existence of this type of market offers to the
owners of shares and bonds the possibility to capitalize them before they
3. CONCLUSIONS
The importance of the financial market is given by the significant role it
plays in the finances (financing) of the enterprises and of the state, by the
percentage the direct financing has among the methods for financing.
Beyond what is apparently important - the high volume of transactions on
the stock market - what really counts is the place the (primary) market holds
in the development first of the stock companies (direct financing), and this is
sometimes forgotten, or appears secondary. The well functioning of the
financial market is a strong fundament for ensuring a lasting growth, on the
long term, of the national economy; the financial market and firstly the
capital market represent in many countries and could also represent in
Romania the engine for economic development.
If to a certain extent they can be
replaced as financing sources, it must not be understood that financing
through the banking system and financing through the capital market are
perfectly replaceable, but rather complementary. In most cases, the issuing
of shares or bonds tend to sooner supplement, than replace the bank loans,
especially when the allocation of some important resources is wanted for
sustaining some large investment plans, when a farther horizon for the
maturity of the loan is sought, or even obtaining non-refundable funds for
the price of dilution of capital and future dividends.
Capital Market
instruments are:
Equity
Preference shares
Debenture/ Bonds
ADRs/ GDRs
Derivatives
Corporate securities
Shares
The total capital of a company may be divided into small units called shares.
For example, if the required capital of a company is US $5,00,000 and is
divided into 50,000 units of US $10 each, each unit is called a share of face
value US $10. A share may be of any face value depending upon the capital
required and the number of shares into which it is divided. The holders of the
shares are called share holders. The shares can be purchased or sold only in
integral multiples.
Equity shares signify ownership in a corporation and represent claim over the
financial assets and earnings of the corporation. Shareholders enjoy voting
rights and the right to receive dividends; however in case of liquidation they
will receive residuals, after all the creditors of the company are settled in full.
A company may invite investors to subscribe for the shares by the way of:
Public issue through prospectus
Tender/ book building process
Offer for sale
Placement method
Rights issue
Stocks
The word stock refers to the old English law tradition where a share in the
capital of the company was not divided into shares of fixed denomination
but was issued as one chunk. This concept is no more prevalent, but the
word stock continues. The word joint stock companies also refers to this
tradition.
Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and
repay the borrowed amount after a specified period of time is a debt
instrument. Certain features common to all debt instruments are:
Maturity the number of years over which the issuer agrees to meet the
contractual obligations is the term to maturity. Debt instruments are
classified on the basis of the time remaining to maturity
Par value the face value or principal value of the debt instrument is called
the par value.
Coupon rate agreed rate of interest that is paid periodically to the
investor and is calculated as a percentage of the face value. Some of the
debt instruments may not have an explicit coupon rate, for instance zero
coupon bonds. These bonds are issued on discount and redeemed at par.
Thus the difference between the investors investment and return is the
interest earned. Coupon rates may be fixed for the term or may be variable.
Call option option available to the issuer, specified in the trust indenture,
to call in the bonds and repay them at pre determined price before
maturity. Call feature acts like a ceiling f or payments. The issuer may call
the bonds before the stated maturity as it may recognize that the interest
rates may fall below the coupon rate and redeeming the bonds and replacing
them with securities of lower coupon rates will be economically beneficial. It
is the same as the prepayment option, where the borrower prepays before
scheduled payments or slated maturity
Some bonds are issued with call protection feature, i.e they would
not be called for a specified period of time
Similar to the call option of the issuer there is a put option for the
investor, to sell the securities back to the issuer at a predetermined
price and date.
The investor may do so anticipating rise in the interest rates wherein the
investor would liquidate the funds and alternatively invest in place of higher
interest
Refunding provisions in case where the issuer may not have cash to
redeem the debt instruments the issuer may issue new debt instrument and
use the proceeds to repay the securities or to exercise the call option.
Debt instruments may be of various kinds depending on the repayment:
Bullet payment instruments where the issuer agrees to repay the entire
amount at the maturity date, i.e lumpsum payment is called bullet payment
Sinking fund payment instruments where the issuer agrees to retire a
specified portion of the debt each year is called sinking fund requirement
Amortization instruments where there are scheduled principal
repayments before maturity date are called amortizing instruments
Debentures/ Bonds
The term Debenture is derived from the Latin word debere which means to
owe a debt. A debenture is an acknowledgment of debt, taken either from
the public or a particular source. A debenture may be viewed as a loan,
represented as marketable security. The word bond may be used
interchangeably with debentures.
Debt instruments with maturity more than 5 years are called bonds
Yields
Most common method of calculating the yields on debt instrument is the
yield to maturity method, the formula is as under:
YTM = coupon rate + prorated discount / (face value + purchase price)/2
Preference shares
Preference shares are different from ordinary equity shares. Preference share
holders have the following preferential rights
(i) The right to get a fixed rate of dividend before the payment of dividend to
the equity holders.
(ii) The right to get back their capital before the equity holders in case of
winding up of the company.
to finance their growth plans or meet their working capital requirements, etc.
After the public issue, the securities of the issuer are listed on a stock
exchange(s) provided it complies with requirements prescribed by the stock
exchange(s) in this regard. The securities, thereafter, become marketable.
The issuers generally get their securities listed on one or more than one
stock exchange. Listing of securities on more than one stock exchange
enhances liquidity of the securities and results in increased volume of
trading. A formal public offer consists of an invitation to the public for
subscription to the equity shares, preference shares or debentures has to be
made by a company highlighting the details such as future prospects,
financial viability and analyse the risk factors so that an investor can take an
informed decision to make an investment. For this purpose, the company
issues a prospectus in case of public issue and a letter of offer in case of
rights issue, which is essentially made to its existing shareholders. This
document is generally known as Offer document. It has the information
about business of the company, promoters and business collaboration,
management, the board of directors, cost of the project and the means of
finance, status of the project, business prospects and profitability, the size of
the issue, listing, tax benefits if any, and the names of underwriters and
managers to the issue, etc.
The issuers are, thus, required to make adequate disclosures in the offer
documents to enable the investors to decide about the investment.
Making public issue of securities is fraught with risk. There is always a
possibility that the issue may not attract minimum subscription stipulated in
the prospectus. The risk may be high or low depending upon promoters
making the issue, the track record of the company, the size of the issue, the
nature of project for which the issue is being made, the general economic
conditions, etc. Issuers would like to free themselves of this worry and attend
to
CDSL BCCDJune 2010 Page 6 of 144 their operations wholeheartedly if they
could have someone else to worry on their behalf. For this purpose the
companies approach underwriters who provide this service.
Normally, whenever an existing company comes out with a further issue of
securities, the existing holders have the first right to subscribe to the issue in
proportion to their existing holdings. Such an issue to the existing holders is
called Rights issue. The price of the security before the entitlement of rights
issue is known as the cum-rights price. The price after the entitlement of
rights issue is known as the ex-rights price. The difference between the two
is a measure of the market value of a right entitlement. An existing holder,
besides subscribing to such an issue, can let his rights lapse, or renounce his
rights in favour of another person (free, or for a consideration) by signing the
renunciation form.
The companies declare dividends, interim as well as final, generally from the
profits after the tax. The dividend is declared on the face value or par value
of a share, and not on its market price.
demat account and the investor need to fill up the correct 16 digit demat
account number in the application form.
1. How to obtain prerequisites
(i) Obtaining PAN: The website of Tax Information Network of Income Tax
Department provides on-line application for PAN.
The investor can submit his application and make payment on line or off line
and forward physically copies of the required documents [proof of identity,
proof of residence, photograph and demand draft (if the payment is off line)]
to the address mentioned therein.
(ii) Opening Demat account: Just as money is kept in bank account, shares
and debentures can be kept in electronic form in a demat account by an
entity called Depository.
For opening a demat account, the investor has to approach a Depository
Participant (DP), an agent of Depository, and fill up an account opening
form. The list of DPs is available in the websites of Along with the account
opening form, the investor must enclose the any one of the following
document for proof of identity and proof of address as under.
No. Documents for proof of identity
Documents for proof of address
1 Passport
2 Voter ID card
3 Driving license
4 Identity card / document with applicants Photo, issued by
a. Central / State Government and its Departments
b. Statutory / Regulatory Authorities
c. Public Sector Undertakings
d. Scheduled Commercial Banks
e. Public Financial Institutions
f. Colleges affiliated to Universities
g. Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members and;
h. Credit cards / Debit cards issued by banks
5 PAN cards with photograph Bank Passbook
6 - Ration Card
7 - Verified copies of
a) Electricity bills (not more than 2 months old)
b) Residence Telephone bills (not more than 2 months old) and
c) Lease and License agreement /
Agreement for sale
8 - Self-declaration by High Court and
Supreme Court judges, giving the new address in respect of their own
accounts
The investor has to produce the original documents, including PAN card, for
verification by the DP at the time of account opening.
The investor will have to enter into an agreement with DP in the standard
format, which gives details of rights and duties of investor and DP. The
After closure of the issue, you can withdraw your bid till the finalization of the
basis of allotment by making a written application to the RTI.
i. Allotment of shares
Shares will be allotted to you and credited to your demat account within 12
days of the close of the issue.
In the case of bonds/ debentures, the timeline for allotment is 30 days of the
close of the issue.
k. Interest for delay in allotment / refund
You are eligible to receive interest @ 15% p.a. upon delay in allotment /
refund beyond the prescribed period.
l. Any other requirement
Peruse the post issue advertisements issued by the company for the issue
price and the basis of allotment.
m. Listing of the shares
Equity shares are listed on the stock exchange for trading within 12 days of
closure of the issue.
n. Grievance redressal (non receipt of shares, delay in refund etc.)
In case of any grievance in a public issue, you can approach the compliance
officer of the issuer, whose name and contact details are mentioned on the
cover page of the Offer Document.
of which one has not commenced its operations. Out of the 23 remaining
stock exchanges, currently only on four stock exchanges, the trading
volumes are recorded. Most of regional stock exchanges have formed
subsidiary companies and obtained membership of Bombay Stock Exchange,
(BSE) or National Stock Exchange (NSE) or both. Members of these stock
exchanges are now working as sub-brokers of BSE / NSE brokers.
Unlike the fundamental analysts, there are other experts who believe that
largely the forces of demand and supply of securities determine the security
prices, though the factors governing the demand and supply may
themselves be both objective and subjective. They also believe that
notwithstanding the day-to-day fluctuations, share prices move in a
discernible pattern, and that these patterns last for long periods to be
identified by them.
Such analysts are called as Technical Analysts.
Technical analysis is a method of prediction of share price movement based
on a study of price graphs or charts on the assumption that share price
trends are repetitive, and that since
CDSL BCCDJune 2010 Page 9 of 144 investor psychology follows certain
pattern, what is seen to have happened before is likely to be repeated. The
technical analyst is not concerned with the fundamental strength or
weakness of a company or an industry; he studies investor and price
behavior.
A stock market operator who expects share prices to fall in the immediate
future and keeps selling (with the intention to pick up the shares later at a
lower price for actual delivery), causing selling pressure and lowering the
prices further is called a "Bear. The term is derived from the attacking
posture of the bear, pushing downwards.
A stock market operator who expects share prices to rise and keeps buying
(to sell the shares later at higher price), causing buying pressure and
increasing the prices further is called a
Bull. The term is derived from the attacking posture of the bull, pushing
upwards.
Stag is a person who subscribes to a new issue with the primary objective of
selling at profits no sooner than he gets the allotment.
Contract Note is a document given by the stockbroker to his clients giving
particulars of the securities bought / sold, rate and date of transaction and
the brokers commission. The broker sends the contract note after executing
the clients order as an agreement. The contract note must be carefully
preserved, as it is a primary documentary evidence of clients' transactions
being executed by a member of a stock exchange. In case of any dispute
between them, this can be used for the purpose of arbitration or filing
claims / compensation against the member of the stock exchange who has
executed the transaction. It also serves as evidence to the income tax
authorities in verification of computations of short-term or long-term capital
gains or losses.
Buying or selling of securities of a particular company with an expectation
that the prices will increase or decrease in a span of short duration with an
objective to generate income on account of such fluctuations in price is
called Speculation. This is an activity in which a person assumes high
risks, often without regard for the safety of his invested principal, to achieve
capital gains in a short time. Investing in securities with the intention of
holding them for long term for realizing appreciation in the value of the
securities should be the aim of the investors who wish to derive benefits
from holding investments for long term.
Arbitrage means buying shares on one stock exchange at a lower rate and
selling the same on other stock exchange at a higher rate.
Trading of securities
Risk management
Clearing and settlement of trades
Delivery of securities and funds
The origin of the stock exchanges in India can be traced back to the later
half of 19th century. After the American Civil War (1860-61) due to the
share mania of the public, the number of brokers dealings in shares
increased. The brokers organised an informal association in Mumbai named
The Natick Stock and Share Brokers Association in 1875.
Increased activity in trade and commerce during the First World War and
Second War resulted in an increase in the stock trading. Stock exchanges
were established indifferent centre like Chennai, Delhi, Nagpur, Kanpur,
Hyderabad and Bangalore. The growth of stock exchanges suffered a
setback after the end of World War. Worldwide depression affected them.
Most of the stock exchanges in the early stages had a speculative nature of
working without technical strength. Securities and Contract Regulation Act,
1956 gave powers to the central government to regulate the stock
exchanges. The stock exchanges in Mumbai, Calcutta, Chennai,
Ahmadabad, Delhi, Hyderabad and Indore were recognised by the SCR Act.
The Bangalore stock exchange was recognised only in 1963. At present we
have 23 stock exchanges and 21 of them had hardware and software
compliant to solve Y2K problem. Till recent past, floor trading took place in
all the stock exchanges.
In the floor trading system, the trade takes place through open outcry
system during the official trading hours. Trading pests are assigned for
different securities where buy and sell activities of securities took place.
This system needs a face to face contact among the traders and restricts the
trading volume.
The speed of the new information reflected on the prices was rather slow.
The deals were also not transparent and the system favoured the brokers
rather than the investors. The setting up of NSE and OTCEI with the screen
based trading facility resulted in more and more stock exchanges turning
towards the computer based trading. Bombay stock exchange introduced
the screen based trading system in 1995, which is known as BOLT (Bombay
On-line Trading System). Madras stock exchange introduced Automated
Network Trading System (MANTRA) on Oct 7th 1996. Apart from Bombay
stock exchange, Vadodara, Delhi, Pune, Bangalore, Calcutta and
Ahmadabad stock exchanges have introduced screen based trading. Other
exchanges are also planning to shift to the screen based trading. The
turnover and market share of the various stock exchanges are given in
Fixation of Prices
Price is determined by the transactions that flow from investors demand
and suppliers preferences. Usually the traded prices are made known to
the public. This helps the investors to make better decisions.
Ensures Safe and Fair Dealing
The rules, regulations and by-laws of the stock exchanges provide a
measure of safety to the investors. Transactions are conducted under
competitive conditions enabling the investors to get a fair deal.
Aids in Financing the Industry
A continuous market for shares provides a favorable climate for raising
capital. The negotiability and transferability of the securities helps the
companies to raise long-term funds. When it is easy to trade the securities,
investors are willing to subscribe to the initial public offerings. This
stimulates the capital formation.
Dissemination of Information
Stock exchanges provide information through their various publications.
The publish the share prices traded on daily basis along with the volume
traded. Directory of Corporate information is useful for the investors
assessment regarding the corporate. Handouts, handbooks and pamphlets
provide information regarding the functioning of the stock exchanges.
Performance Inducer
The prices of stock reflect the performance of the traded companies. This
makes the corporate more concerned with its public image and tries to
maintain good performance.
Self-regulating Organization
The stock exchanges monitor the integrity of the members, brokers, listed
companies and clients. Continuous internal audit safeguards the investors
against unfair trade practices. It settles the disputes between member
brokers, investors and brokers.
Regulatory Framework
A comprehensive legal framework was provided by the
Securities Contract Regulation Act, 1956 and the Securities and Exchanges
Board of India Act, 1992. A three tire regulatory structure comprising the
Ministry of Finance, the Securities and
Exchanges Board of India and the Governing Boards of the
Stock Exchanges regulate the functioning of stock exchanges.
Ministry of Finance
The stock Exchanges Division of the Ministry of Finance has powers related
to the application of the provision of the SCR Act and licensing of dealers in
the other area. According to
SEBI Act, the Ministry of Finance has the appellate and supervisory powers
over the SEBI. It has power to grant recognition to the stock Exchanges and
regulation of their operations. Ministry of Finance has the power to approve
the appointments of executive chiefs and nominations of the public
The Broker
A member/broker registered with the recognized stock exchange has to
apply to the SEBI for registration. Likewise a sub-broker even though he is
registered with the stock exchange should apply to SEBI for registration.
Usually the agreement between the broker and the sub broker is carried out
on a non judicial stamp paper of Rs 10. The agreement generally specifies
the authority and responsibility of the broker and sub broker.
The broker has to abide by the code of conduct laid down by the SEBI. The
code of conduct prevents the malpractice, manipulation and gives other
statutory requirements. If
A broker is involved in manipulation or price rigging or gives false
information, his registration is likely to be suspended. If the rules and
regulations regarding insiders trading and take over codes are not adhered
to, the registration may even be cancelled.
Broker and the Investor
1. The broker should provide adequate information regarding the stocks.
2. The broker should be capable of giving short term and long term
investment suggestions to the investors.
3. The broker should be able to confirm the purchase and sale of the
securities quickly.
4. He should be able to provide price quotes quickly, which is now possible
with the computer network.
5. The broker should be noted for his integrity. He should have a good name
in the society.
6. The broker should have adequate experience in the market to take
correct decision.
7. The broker should have contact with other stock exchanges to execute
the order profitably.
8. The broker should also offer incidental service like arranging for
financing the clients transaction.
Types of Orders
Buy and sell orders are placed with the members of the stock exchanges by
the investors. The orders are of different types.
Limit Orders
Orders are limited by a fixed price. Buy Reliance Petroleum at Rs 50. Here,
the order has clearly indicated the price at which it has to be bought and
the investor is not willing to give more than Rs 50.
Best Rate Order
Here, the buyer or seller gives the freedom to the broker to execute the
order at the best possible rate quoted on that particular date for buying. It
may be the lowest rate for buying and the highest rate for selling.
Discretionary Order
The investor gives the range of price for purchase and sale. The broker can
use his discretion to buy within the specified limit.
Generally the approximate price is fixed. The order stands as this Buy BRC
100 shares around Rs 40.
Stop Loss Order
The orders are given to limit the loss due to unfavorable price movements in
the market. A particular limit is given for waiting.
If the price falls below the limit, the broker is authorised to sell the shares
to prevent further loss.
Buying and Selling Shares
To buy and sell shares the investor has to locate a registered broker or sub
broker who can render prompt and efficient service to him. Then orders to
buy or sell the specified number of shares of a company of the investors
choice are placed with the broker. The order may be of any of the above
mentioned type. After receiving the order, the broker tries to execute the
order in his computer terminal. Once matching order is found, the order is
executed. The broker delivers the contract note to the investors. It gives
details regarding: the name of the company, number of shares bought,
price, brokerage, and date of delivery of shares. In the physical trading
form, once the broker gets the share certificate through the clearing houses
he delivers the share certificate along with transfer deed to the investor.
The investor has to fill the transfer deed and stamp it.
Stamp duty is one-half percentage of the purchase consideration; the
investor should lodge the share certificate and transfer deed to the registrar
or transfer agent of the company. If it is bought in the demat form, the
broker has to give a matching instruction to his depository participant to
transfer the share bought to the investors account. The investor should be
an account holder in any of the depository participant. In the case of sale of
shares on receiving payment from the purchasing broker, the broker effects
the payment to the investor.
Share Groups
The listed shares are divided into three categories: Group a shares
(specified shares) B1 shares and B shares. The last two groups are referred
to cleared securities or no-specified shares.
The shares that come under specified group can avail the carry forward
transactions. In A group, shares are selected on the basis of equity, market
capitalisation and public holding.
Further it should have a good track record and a dividend paying company.
It should have good growth potential too.
The trading volumes and the investors base are high in A group share. Any
company when it satisfies these criteria would be shifted from B group to
A group.
In the B1 group actively traded shares are included. Carry forward
transactions are not allowed in this group. Settlement takes place through
the clearing house along with the A group shares. The settlement cycle
and the procedure are identical to A group security. The rest of the
company shares listed form the B group.
Settlement Cycle
A settlement cycle consists of five days trading period within which any
transaction buy/sell must be completed. There are two types of settlement:
fixed and rolling. A fixed cycle starts on a particular day and ends after five
days. For example, in the
Mumbai stock exchange the settlement cycle starts on Monday and ends of
Friday. In the NSE it starts on Wednesday of one week and ends on the
Tuesday of the following week. A pay-in day and a pay-out day follow the
settlement cycle. The pay-in day refers to all the buyer brokers depositing
the money for the purchase of shares. The payout day refers to the
exchange handing over the proceeds to the seller brokers.
A settlement cycle is important for the investors and brokers. If, an investor
purchases 1000 shares of Asian Paints on Monday, to square up the position
by the end of the settlement, the sale will have to take place before Friday,
the same week. If the sale has not taken place, he has to paya consideration
for the broker at the end of the settlement period. The broker collects the
payments from the clients and deposits it with the exchange on the pay-in
day. The exchange allows four days, from the end of the settlement cycle to
the pay-in day to enable the brokers to collect the payments from the
clients. After found days, on the pay-out day the exchange hands over the
proceeds to the seller broker. The same trading/settlement cycle and
procedure of the specified group are followed in the B1 non-specified
group.
But no carry forward (Badla) transaction is allowed for B1 group shares.
The pay-in for B1 group securities can be done with A group
simultaneously under one balance sheet.
In the B group shares, clearing house handles the money and part of the
transaction. Physical delivery of securities is done by the members. In the
pay-in day the balance sheet is filed Along with cheques/drafts. Only on the
payout day monetary are made by the clearings house.
LEGAL FRAMEWORK
The exigencies of the market and the flexibility of the regulators are
maintained through the exercise of delegated legislation to the regulators.
Under this the regulators issue notifications, circulars and guidelines which
are to be complied by the market participants.
Various activities in the securities market in India are regulated in a
coordinated manner by four regulators namely Department of Economic
Affairs (DEA) of the Ministry of Finance, Ministry of Company Affairs,
Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
(RBI).
The regulatory and the supervisory framework of the securities market in
India has been progressively strengthened through various legislative and
administrative measures and is consistent with the best international
The Government has framed rules under the Securities Contract (Regulation)
Act SC(R)A, SEBI Act and the Depositories Act. SEBI has framed regulations
under the SEBI Act and the Depositories Act for registration and regulation of
all market intermediaries, for prevention of unfair trade practices, insider
trading, etc. Under these Acts, Government and SEBI issue notifications,
guidelines, and circulars, which need to be complied by the market
participants.
The self-regulatory organizations (SROs) like stock exchanges have also laid
down their rules and regulations for market participants.
Regulators
Investigation
voting rights held and change in shareholding or voting rights, if there has
been a change in such holdings from the last disclosure made and the
change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total
shareholding or voting rights, whichever is lower. The disclosure mentioned
above should be made within 2 working days of:
(i) The receipt of intimation of allotment of shares, or
(ii) The acquisition or sale of shares or voting rights, as the case may be.
(iii) Disclosure by Company to Stock Exchanges
Every listed company, within two days of receipt, should disclose to all stock
exchanges on which the company is listed, the information relating to
continual and initial disclosure given above. The disclosures required under
this regulation may also be made through electronic filing in accordance with
the system devised by the stock exchanges. Further, the SEBI Act, which
inter-alia, prescribes the penalty for insider trading (Section 15G), was
amended in 2002 to increase the penalty for insider trading to Rs 25 crore or
three times the amount of profits made out of insider trading, whichever is
higher.
LEARNING EXPERIENCE
The first thing that I have learned is, I have knowledge of capital market. I
also come to know the working of Ludhiana stock exchange i.e. how the
different departments are performing their jobs successfully. It was a
wonderful experience interacting with different people and simultaneously
enhancing my knowledge and skills about stock market operators. Ludhiana
stock exchange also provides practical training under sub brokers. I also
come to know about how on live trading is done, how shares are bought and
sold. I also learned that how to work under the stock exchange. The working
culture of Ludhiana stock exchange is quite good. Under the training
education department, the higher authorities of LSE conduct the Training
Exam and Viva before providing training certificate. It is very good
experience in Ludhiana stock exchange.
CONCLUSION:
Securities market plays an important role. The capital market deals with long
term securities which have a maturity period of above one year. A market in
which individuals and institutions trade financial securities. Organization
/institution in the public and private sectors also often sell securities on
capital markets in order to raise funds. Thus, type of market is composed of
entering a derivative market is called hedgers, and those who increase risks
are called speculators.