Stock Exchange

Trimester I
2009
1

The stock exchange is a highly organized market for the purchase and sale
of second hand quoted or listed securities. Stock exchange is a market in
which securities are bought and sold and it is an essential component of a
developed capital market.

According to the Securities ontracts !"egulation# Act$ 1%&'$ (Stock

)xchange means any body of individuals$ whether incorporated or not$
constituted for the purpose of assisting$ regulating or controlling the
business of buying$ selling or dealing in securities.*
Securities include+

Shares$ scrips$ stocks$ bonds$ debentures or other marketable securities of

a like nature

,overnment securities

Stock )xchange is an important part of the apitalistic system of economy.

-t is indispensable for the smooth functioning of a corporate enterprise.

-t provides the necessary mobility to capital and directs the flow of capital
into profitable and successful enterprises.

-t exerts a powerful and significant influence as a depressant or stimulant of

business activity.

-t maybe defined as the place or market where securities of .oint stock

companies and of government or semi government bodies are dealt in.
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Importance:
0nly an organized securities market can provide sufficient marketability and price
continuity for shares
-s only such a market that can provide reasonable measure of safety and fair dealing
in buying and selling of securities.
Through the interplay of demand for and supply of securities$ properly organized
stock exchange results in a reasonably correct evaluation of securities in terms of
their real worth.
Through such evaluation of securities$ the stock exchange helps in the orderly flow
of savings between different types of investments.
Objective and Role of Stock Exchange+
To safeguard the interest of investing public
To establish and promote honorable and .ust practices in securities transactions.
To promote$ develop and maintain a well regulated market for dealing in
securities.
To promote industrial development in the country through efficient resource
mobilization by way of investment in corporate securities.
To enable flow of capital into most efficient industries. The market price and
relative yield of a security are the guiding factors.
-t encourages people to save invest in corporate securities thereby accelerating
capital formation.
"aising long term capital+ The existence of a stock exchange enable companies
to raise permanent capital.
1

2ealings on the Stock exchange are sub.ect to the bye3

laws and rules of the Stock )xchange.

Stock exchange dealings in -ndia are regulated by the

Securities ontracts !"egulation# Act and the Securities
and exchange 4oard of -ndia !S)4-#. There are two
important types of trading on the stock exchange namely
"eady 2elivery and 5orward 2elivery ontract.

"eady 2elivery contract$ also known as cash trading or cash

transactions$ are to be settled either on the same date or within
a short period that may extend at best upto seven days. !-f the
payment and delivery of securities is on the same day or on the
next day$ it may be called Spot 2elivery ontract#.

5orward 2elivery contracts are discharged on fixed settlement

days. They are confined to those securities which are placed on
the forward lists.
6
Speculation on the Stock )xchange

Stock exchange transactions are made either for the purpose of investment
or speculation.

-nvestment transactions are made with the idea of earning a return on the
securities by holding them more or less permanently whereas speculative
transactions are made with the intention of making gains by disposing of the
securities at favorable prices.

-nvestment transactions require actual delivery of securities on the part of

sellers and the payment of their full price by its buyers.

Speculative transactions does not involve full payment for and taking
delivery of the securities that the speculators have contracted to transfer.
The transaction can be made by the deposit of a fractional part of the price.
The volume of speculative transaction far exceed that of investment
transaction on a stock exchange. -t is therefore argued that speculation is
necessary to ensure sufficient volume and continuity of business in the
stock exchange.

There are /1 stock exchanges functioning in -ndia including the 0T)-

!0ver the ounter )xchange of -ndia# and the 7ational Stock )xchange
!7S)#. The 4ombay Stock exchange established in 1898 is the oldest in
Asia. There are over 1:$::: companies listed and the number of investors
is also one of the largest in the world. 0nly members and their authorized
clerks can enter the trading floor and conduct buying and selling of
securities
&
Types of Speculator+

4ull+ -s a speculator who buys shares in the expectation of selling it at a

higher price.

4ear+ Sells securities in the expectation of a fall in their prices in future.

Stag+ 7either buys nor sells but applies for subscription to the new issues
expecting that he can sell them later at a premium.

0ption 2ealing+ 0ption is the right to buy or sell a certain quantity of the
security at a certain price within a certain time. The option to buy is known
as all 0ption and the option to sell is know as a ;ut 0ption. -n an option
dealing$ the speculator is given the right or option to buy or sell$ or both buy
and sell as the case maybe on the settlement day or else he will forfeit the
option money.

arry 0ver !4adla# transaction+ This refers to the facility of carry3over of the
completion of a forward contract to another < next settlement period any
number of times on payment of the badla charge
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Over The Counter Exchange of India

The 0T)- was incorporated in 1%%: and became fully operational in 1%%/.

The 0T)- is meant primarily to trade securities of the listed companies$

like the other stock exchanges. =et there is no physical location of the
0T)-$ no counters$ no trading ring$ no stock exchange building.

The 0T markets are fully automated exchanges where transactions are

completed through a network of telephones and computers.

0ver the ounter basically implies trading across the counter in scrips
which are listed on the stock exchange. The minimum issued capital of a
company for eligibility for listing on the 0T)- is "s. 1: lakhs$ sub.ect to a
minimum public offer of equity shares worth "s. /: lakhs. Any company
which wants to list its shares on the 0T)- will have to be sponsored by a
sponsor.
Feature:

The 0T)- is a company promoted by 5inancial -nstitutions

There are many restrictions on listing on the 0T)-. A ompany listed on

any other recognized stock exchange in -ndia would not simultaneously be
eligible for listing on the 0T)-.

>ethod of price fixation differs b<w 0T)- and other )xchanges. 0n the
0T)- the pricing of scrips is regulated while speculation could cause wide
price fluctuations on the regular exchanges
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Over The Counter Exchange of India
Feature !contd"#$

The 0T )xchange is a market for spot deals only

The settlement takes place daily

The 0T)- permits automatic transfer upto :.&? of a company@s equity

while in other stock exchanges permission of the companies is needed.

Spread does not exceed a specific percentage

The 0T)- is characterized by a decentralized working

%enefit:

Auick payment of money

;rice transparency

Saves the investor from other unscrupulous behavior of the brokers.

Simple procedure of buying and selling

5acility to sell even odd lots

Biquidity even for scrips of small and new companies

5acilitates new issues at lower costs

>akes raising of capital through issues very easy for small$ new and closely held
companies.
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&ational Stock Exchange !&SE$

This was established in 1%%6 by financial institutions with -24- as a nodal

agency. The 7S) was conceived as a model exchange with a nation wide
electronic screen based (scripless* and (floorless* trading system in
securities which is both efficient and transparent and offer equal and nation
wide access to investors.

7S) operates on the 7ational )xchange for Automated Trading !7)AT#$ a

fully automated screen based trading system which adopts the principle of
an order driven market.
The 7S) operates in+

Cholesale 2ebt market

apital >arket.

0b.ectives+

To establish nation wide trading facility for equities$ debts and hybrids.

To facilitate equal access to investors across the country.

To provide fairness$ efficiency and transparency to the securities trading

To enable shorter settlement cycles

To meet international securities market standard

%
&ational Stock Exchange !&SE$
5eatures of 7S)+

The 7S) employs a fully automated screen based trading system

-t has two segments ie the Cholesale 2ebt market and the apital
market.

There is no trading floor

The trading member in the capital market segment are linked

through a satellite link3up while those in the Cholesale 2ebt market
segment are linked through dedicated high speed lines.

The 7S) has opted for an order driven system.

Chen a trade takes place$ a trade confirmation slip is printed at the

trading member@s workstation.

The identity of the trading member is not revealed to others when he

place the order. Therefore$ large orders can be placed without
influencing the market sentiment.

The automated trading system secures the best price available in

the market
1:
Securitie Contract !Regulation$ 'ct:
)nacted in 1%&' and came into force in 1%&9.
0b.ectives+

The ob.ective of the Act is it prevent undesirable transactions in

securities by regulating the business if dealings in securities and by
providing for certain matters connected with transaction in securities.

To empower the "4- to regulate the dealings in and functioning of the

stock exchange in -ndia

To promote healthy and orderly development of the stock market

To prevent unhealthy speculation and other undesirable activities on

the stock exchange

To protect the interest of the investors

To provide for reasonable uniformity in respect of the bye3laws and

rules of the different stock exchanges of -ndia.
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Securitie Contract !Regulation$ 'ct:
>ain ;rovisions+
The Act empowers the entral ,overnment or in some cases S)4-
pertaining to+

The grant of recognition or withdrawal of recognition to any stock

exchange

Approval of the bye3laws and rules of stock exchange

;ower to direct the stock exchange to make or amend rules and bye3
laws

>onitoring the activities and functioning of the stock exchanges by

calling for periodic returns and specific information

;ower to suspend business of any stock exchange

;ower to supersede the governing body of any stock exchange on

account of specific reasons

"egulation of listing of securities.

1/
Securitie and Exchange %oard of India

The S)4- was constituted in 1%88 by a resolution of ,0- and it was made a statutory
body by the Securities and and )xchange 4oard of -ndia Act$ 1%%/.

The Act empowers the entral ,overnment to supersede S)4- if on account of

emergency$ S)4- is unable to perform the functions and duties under any provision of
the AT.
Objective:

To protect the interests of investors in securities and to promote the development of

and to regulate the securities market for matters connected therewith.
(o)er and Function:

"egulates the business in stock exchanges and any other securities market.

"egistering and regulating the working of stock brokers$ sub3brokers etc.

"egistering and regulating the working of collective investment schemes

;romoting and regulating self regulatory organizations

;rohibiting fraudulent and unfair trade practices in securities market

;romoting investor education and training of intermediaries in securities market

;rohibiting insider trading in securities.

"egulating substantial acquisition of shares and take3over by companies

onducting inspection and inquiries

Bevying fees or other charges

onducting research
11
apital >arket "eforms
The ob.ective of the reforms was to+

;rovide for effective control of the stock exchange operations

-ncrease the information flow and disclosures so as to enhance the

transparency

;rotect the interests of investors

heck insider trading

-mprove the operational efficiency of the stock exchanges

;romote healthy development of the capital market.

Important meaure of reform and development include:

5ree ;ricing

-ntroduction of book building

)lectronic Trading

-nstruments and >arket ;articipants

-mprovement in Trading$ learing and Settlement Systems

-ncreased 2ematerialization

7ear )limination of ounter ;arty "isk

ircuit 4reakers < ;rice 4ands

Structure of -nformational 5lows

)mphasis on 5air Trading ;ractices

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apital >arket "eforms !contdD.#

Free (ricing: ;rior to 1%%/$ raising of capital from the securities

market was regulated by the apital -ssues !ontrol# Act$ 1%69
wherein the companies had to obtain approval from the ontroller of
apital -ssues !-# for raising resources. 7ew companies were
allowed to issue shares at par while existing companies with
reserves could issue shares at a premium based on a prescribed
formula.

-n 1%%/$ the apital -ssues !ontrol# Act 1%69 was repealed. Since
then issuers of securities can raise resources from the market
without requiring any consent from an authority either for making the
issue or for pricing it. "estrictions on rights and bonus issues have
also been removed. Eowever$ the issuers need to meet the
guidelines of S)4- on disclosure and investor protection.

Introduction of %ook %uilding+ The book building mechanism was

introduced in 1%%& to determine the right price at which the market
would clear the issue. This is a method through which an offer price
of an -;0 is based on investors demand. This gave the investor the
choice to raise resources either through this or the fixed price
mechanism
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apital >arket "eforms !contdD.#

Electronic Trading+ Till recently$ trading on the stock exchange took place
through an open outcry system. At present$ all the stock exchanges have
adopted on3online screen based electronic trading$ replacing the open
outcry system. )lectronic trading results in+ Transparency$ more efficient
price discovery and reduction in transaction costs. The screen based trading
also offers the advantage of integrating different trading centres all over the
country into a single trading platform.

Intrument and *arket (articipant+ -n the -ndian capital market$

traditionally two instruments were traded ie. debt and equity. Eowever$
during mid eighties and nineties$ a wide range of innovative < hybrid
instruments combining both the features of debt and equity were introduced
to suit various needs of consumers. 4esides$ 25-s$ ;SFs also issued many
debt instruments.

Improvement in Trading+ Clearing and Settlement S,tem+ >easures

were taken to shorten the settlement cycle through the introduction of rolling
settlement system and acceleration of the process of electronic book entry
transfer.
1'
apital >arket "eforms !contdD.#

Increaed -emateriali.ation+ Begislative changes were carried out$ for

maintaining ownership records in an electronic book entry form. Fnder this
mode$ securities are transferred in a speedy and safe manner. An element
of compulsion was introduced by requiring the individual and institutional
investors to settle trade compulsorily in dematerialized form in shares of
select companies.

&ear Elimination of Counter/(art, Rik: 0ne of the shortcomings of the

clearing and settlement process of the -ndian stock markets was the
absence of a system to reduce counter party risk. >anaging this risk is
essential for promoting a safe and efficient market. The risk that the other
party in an agreement will default. To provide the necessary funds and
ensure timely completion of settlements in cases of failure of member
brokers to fulfill their settlement obligations$ ma.or stock exchanges have set
up Settlement ,uarantee 5unds. The aggregate corpus of the 5und at the
stock exchanges is presently over "s. 1::: crore. The 7S) has set up a
clearing corporation which guaranteed settlement of all trades. The clearing
corporation therefore assumes the counter party risk involved in all the
transactions. All transactions are settled through clearing houses set up by
the stock exchanges
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apital >arket "eforms !contdD.#

Circuit %reaker 0 (rice %and:

To contain abnormal price variations$ scrip wise specific daily price bands or
circuit breakers in -ndia were introduced in 1%%& whereby the trading
automatically got suspended if the prices varied either side beyond
8?further trading was allowed only upto the price band.

;rice bands which were originally fixed at 8? were relaxed in Ganuary /:::$
whereby a further variation of 6? in the scrip beyond 8?$ after a cooling off
period of 1: minutes$ was allowed. This was made applicable in the case of
1:: scrips.

-n Gune /:::$ for all scrips under compulsory rolling settlement$ the price
band was relaxed by 8? with half an hour cooling period after the scrip had
hit the initial price band of 8?.

urrently$ the circuit breakers in place are at 1:? with a cooling off period
and subsequently 1&? and /:?.

Emphai on Fair Trading (ractice:

-nsider trading has been made a criminal offence punishable in accordance

with the provision under the S)4- Act 1%%/$ prohibiting dealings$
communication or counselling in matters related to insider trading. There are
separate regulations in place governing substantial acquisition of shares
and takeovers of companies. The regulations are aimed at making the
takeover process more transparent and to protect the interests of minority
shareholders.
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apital >arket "eforms !contdD.#
Structure of Informational Flo)
Several measures were taken to enhance transparency of the companies+

A company offering securities in the -ndian capital market is required to

make a public disclosure of all relevant information through its offer
document.

After a security is issued to the public and subsequently listed on a stock

exchange$ the stock exchange requires the issuing company to make
continuing disclosures under the listing agreement.

-n -ndia$ all companies are now required to furnish to the stock exchanges
and also publish mandated unaudited financial results on quarterly basis.

ompanies are required to make decisions regarding dividend$ bonus and

rights announcements within fifteen minutes of the conclusion of the 4oard
>eeting
1%
>arket 2esign in -ndian Securities >arket

S)4- is the specialized regulator and is vested with powers to

protect investors interest and to develop and regulate securities
market.

;ricing of securities is market determined$ either by the issuer

through fixed price or by the investors through book building.

orporates are allowed to issue A2"s<,2"s and raise )4s. 5--s

are allowed to trade in -ndian market.

Cith regards to corporate compliance$ there is considerable

emphasis on disclosures$ accounting standards and corporate
governance.

The trading mechanism is screen based trading system$ orders are

matched on price time priority$ transparent$ trading platform is
accessible from all over the country.

The settlement is done through the clearing house of the exchange

or the clearing corporation.

The settlement cycle is rolling settlement on TH/ basis. Eowever$

there are provisions where it can be settled by the third day.

4asis of settlement is mostly electronic.

Securities are freely transferable and transfers are recorded

electronically.
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