History of Indian Stock Market:

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities. In the
1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840
and 1850.
In fact the 'Share Mania' in India began with the American Civil War broke and the cotton
supply from the US to Europe stopped. Further the brokers increased to 250. The informal
group of stockbrokers organized themselves as the the Native Share and Stockbrokers
Association which, in 1875, was formally organized as the Bombay Stock Exchange
(BSE).
In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act. The most decisive
period in the history of the BSE took place after 1992. In the aftermath of a major scandal
with market manipulation involving a BSE member named Harshad Mehta, BSE responded
to calls for reform with intransigence.
The foot-dragging by the BSE helped radicalise the position of the government, which
encouraged the creation of the National Stock Exchange (NSE), which created an electronic
marketplace. NSE started trading on 4 November 1994.

Debenture
 Debentures are a debt instrument used by companies and government to issue the loan.
The loan is issued to corporates based on their reputation at a fixed rate of interest.
Debentures are also known as a bond which serves as an IOU between issuers and
purchaser. Companies use debentures when they need to borrow the money at a fixed rate
of interest for its expansion. Secured and Unsecured, Registered and Bearer, Convertible
and Non-Convertible, First and Second are four types of Debentures.
 In layman’s term, a Debenture is the acknowledgment of the debt the organization has
taken from the public at large. They are very crucial for raising long-term debt capital. A
company can raise funds through the issue of debentures, which has a fixed rate of
interest on it. The debenture issued by a company is an acknowledgment that the
company has borrowed an amount of money from the public, which it promises to repay
at a future date. Debenture holders are, therefore, creditors of the company.

What Are Shares?

 Shares are units of equity ownership interest in a corporation that exist as a financial
asset providing for an equal distribution in any residual profits, if any are declared, in
the form of dividends. Shareholders may also enjoy capital gains if the value of the
company rises.

 Shares represent equity stock in a firm, with the two main types of shares
being common shares and preferred shares. As a result, "shares" and "stock" are
commonly used interchangeably.
What Is a Mutual Fund?
 A mutual fund is a type of financial vehicle made up of a pool of money collected
from many investors to invest in securities like stocks, bonds, money market
instruments, and other assets. Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt to produce capital gains or
income for the fund's investors. A mutual fund's portfolio is structured and maintained
to match the investment objectives stated in its prospectus.

 Mutual funds give small or individual investors access to professionally managed

portfolios of equities, bonds, and other securities. Each shareholder, therefore,
participates proportionally in the gains or losses of the fund. Mutual funds invest in a
vast number of securities, and performance is usually tracked as the change in the
total market cap of the fund—derived by the aggregating performance of the
underlying investments.

What Is a Derivative?
 A derivative is a financial security with a value that is reliant upon or derived from, an
underlying asset or group of assets—a benchmark. The derivative itself is a contract
between two or more parties, and the derivative derives its price from fluctuations in
the underlying assets.

 The most common underlying assets for derivatives are stocks, bonds, commodities,
currencies, interest rates, and market indexes. These assets are commonly purchased
through brokerages. Derivatives can trade over-the-counter (OTC) or on an exchange.
OTC derivatives constitute a greater proportion of the derivatives market. OTC-traded
derivatives, generally have a greater possibility of counterparty risk. Counterparty risk
is the danger that one of the parties involved in the transaction might default. These
parties trade between two private parties and are unregulated.

Stock Exchanges:

 Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or
other securities.
 The members may act either as agents for their customers, or as principals for their
own accounts.
 Stock exchanges also facilitates for the issue and redemption of securities and other
financial instruments including the payment of income and dividends. The record
keeping is central but trade is linked to such physical place because modern markets
are computerized.
 The trade on an exchange is only by members and stock broker do have a seat on the
exchange.
SEBI is essentially a statutory body of the Indian Government that was established on the
12th of April in 1992. It was introduced to promote transparency in the Indian investment
market. Besides its headquarters in Mumbai, the establishment has several regional offices
across the country including, New Delhi, Ahmedabad, Kolkata and Chennai.
It is entrusted with the task to regulate the functioning of the Indian capital market. The
regulatory body lays focus on monitoring and regulating the securities market in India to
safeguard the interest of investors and aims to inculcate a safe investment environment by
implementing several rules and regulations as well as by formulating investment-related
guidelines.

Powers and Functions of SEBI 

Being a regulatory body, SEBI India has several powers to perform vital functions. The
SEBI Act of 1992 carries a list of such powers vested in the regulatory body.
The functions of SEBI make it an issuer of securities, protector of investors and traders
and a financial mediator.
The following pointers offer a brief idea about the same.

Functions –
 To protect the interests of Indian investors in the securities market.

 To promote the development and hassle-free functioning of the securities market.

 To regulate the business operations of the securities market.

 To serve as a platform for portfolio managers, bankers, stockbrokers, investment

advisers, merchant bankers, registrars, share transfer agents and other people.

 To regulate the tasks entrusted on depositors, credit rating agencies, custodians of

securities, foreign portfolio investors and other participants.

 To educate investors about securities markets and their intermediaries.

 To prohibit fraudulent and unfair trade practices within the securities market and
related to it.

 To monitor company take-overs and acquisition of shares.

 To keep the securities market efficient and up to date all the time through proper
research and developmental tactics.
DEMAT SYSTEM

A DEMAT account (short for Dematerialized account) is an account to hold financial

securities (equity or debt) in electronic form. In India, DEMAT accounts are maintained by
two depository organisations, National Securities Depository Limited and Central Depository
Services Limited.
The DEMAT account number is quoted for all transactions to enable electronic settlements of
trades to take place. Access to the Dematerialized account requires an internet password and
a transaction password. Transfers or purchases of securities can then be initiated. Purchases
and sales of securities on the Dematerialized account are automatically made once
transactions are confirmed and completed.

What is dematerialisation?

Dematerialisation is the process of converting the physical share certificates into electronic
form, which is a lot easier to maintain and is accessible from anywhere throughout the world.
An investor who wants to trade online needs to open a Demat with a Depository Participant
(DP). The purpose of dematerialisation is to eliminate the need for the investor to hold
physical share certificates and facilitating a seamless tracking and monitoring of holdings.

Working of a Demat Account:

First of all, it is important to note that along with a Demat Account, you get a linked trading
account as well, with a unique login ID and password. This is used to buy/sell shares. A
Demat Account is then used to hold the bought shares.
So when you want to buy or sell a particular share, you need to login to your trading account,
which is also linked to your bank account. When a ‘buy’ or ‘sell’ request is put in the trading
account for a particular stock, with other details, your Depository participant (DP) then
forwards this to the stock exchange immediately.

In case, the order is to ‘buy’, the stock exchange then finds a seller who wants to sell the
same quantity of shares and sends an order to clearance houses to debit the particular number
of shares from the seller’s Demat Account and credit it to the buyer’s Demat Account. And
this is how a single trade in the stock market takes place.
The buyer and seller can hold Demat Accounts with DPs belonging to different depositories.
Insider trading?

Insider trading involves the deliberate exploitation of unpublished price sensitive information
obtained through or from a privileged relationship for trading in shares and securities for the
purposes of gain (or to avoid a loss) at the expense of the uninformed public when the price
of securities would be materially altered if the information were disclosed.
The misuse of confidential information is frowned upon for several reasons including:
1.It involves taking a secret and unfair advantage;
2.It gives rise to potential conflict of interests in which the company’s best interest may
wrongfully take second place to the insider’s self-interest;
3.It brings the market into disrepute and may be a disincentive to investment;
4.It is unethical as it amounts to a breach of the fiduciary position of trust and confidence.

Punishment

According to the SEBI Act, Insider Trading is punishable with a penalty of INR 250,000,000,
or three times the profit made from insider trading, whichever is higher. Any person
contravening or attempting to contravene or abetting the contravention of the Act may extend
to 10 years or a fine, which may extend to INR 250,000,000 or both. The regulations also
prescribe certain disciplinary sanctions that may be taken by companies or market
intermediaries to require due compliance with the Regulations.

Foreign Exchange and Management Act, 1999

Background The Foreign Exchange Management Act, 1999 was enacted to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade
and payments and for promoting the orderly development and maintenance of foreign
exchange market in India. In fact it is the central legislation that deals with inbound
investments into India and outbound investments from India and trade and business between
India and the other countries.

The FEMA provides:

 Free transactions on current account subject to reasonable restrictions that may

be imposed
 RBI control over Capital Account Transactions
 Control over realization of export proceeds
 Dealings in Foreign Exchange through Authorised Person (e.g Authorised
Dealer/ Money Changer/ Off-shore Banking Unit)
 Adjudication of Offences
  Appeal provisions including Special Director (Appeals) and Appellate
Tribunal
 Directorate of Enforcement

AUTHORITIES AND ENFORCEMENT MACHINERY UNDER FEMA

FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at
different places and so are there regulatory bodies. Reserve Bank of India (RBI) makes
regulations for FEMA and the rules are made by Central Government.

Though RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA
has been entrusted to a separate “Directorate of Enforcement” formed for this purpose.
(Section 36)

Authorities governing the enforcement of FEMA:

 Foreign Exchange Department of Reserve Bank of India (RBI)

– fema.rbi.org.in
 Directorate of Enforcement, Department of Revenue, Ministry of
Finance- http://directorateofenforcement. gov.in
 Capital Markets Division, Department of Economic Affairs, Ministry of
Finance – http:// finmin.nic.in/the ministry/dept eco affairs/
 Foreign Trade Division, Department of Economic Affairs, Ministry of Finance
– http:// finmin.nic.in/theministry/dept eco affairs/

HISTORY OF FEMA, 1999

In the backdrop of acute shortage of Foreign Exchange in the country, the Foreign Exchange
Regulation Act of 1973 (FERA) was enacted. This legislation was passed by the Indian
Parliament by the government of Indira Gandhi but it came into force with effect from
January 1, 1974. FERA had a controversial 27 year stint during which many bosses of the
Indian Corporate world found themselves at the mercy of the Enforcement Directorate.

FERA imposed stringent regulations on certain kinds of payments. It dealt in foreign

exchange and securities and the transactions which had an indirect impact on the foreign
exchange and the import and export of currency. The purpose of the act, inter alia, was to
“regulate certain payments, dealings in foreign exchange and securities, transactions
indirectly affecting foreign exchange and the import and export of currency, for the
conservation of foreign exchange resources of the country”. It was repealed in 1999 by the
government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management
Act, which liberalised foreign exchange controls and restrictions on foreign investment.

FEMA had become the need of the hour since FERA had become incompatible with the pro-
liberalisation policies of the Government of India. It brought a new management regime of
Foreign Exchange consistent with the emerging framework of the World Trade Organisation
(WTO). It is another matter that the enactment of FEMA also brought with it the Prevention
of Money Laundering Act 2002, which came into effect from 1 July 2005.