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Transcript of Stock Exchange
1. Introduction to Financial Market
Introduction
Financial market is an institution that facilitates the exchange of financial
instruments. In general, the financial market divided into two parts, Money
market and capital market. Securities market is an important, organized capital
market where transaction of capital is facilitated by means of direct financing
using securities as a commodity. Securities market can be divided into a primary
market and secondary market.
The stock market can be a great source of confusion for many people. The
average person generally falls into one of two categories. The first believe
investing is a form of gambling; they are certain that if you invest, you will more
than likely end up losing your money. Often these fears are driven by the personal
experiences of family members and friends who suffered similar fates or lived
through the Great Depression. These feelings are not ground in facts and are the
result of personal experience. Someone who believes along this line of thinking
simply does not understand what the stock market is or why it exists.
The second category consists of those who know they should invest for the long-
run, but don’t know where to begin. Many feel like investing is some sort of black-
magic that only a few people hold the key to. More often than not, they leave
their financial decisions up to professionals, and cannot tell you why they own a
particular stock or mutual fund. Their investment style is blind faith or limited to
“this stock is going up. We should buy it.” This group is in far more danger than
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the first. They invest like the masses and then wonder why their results are
mediocre (or in some cases, devastating).
In this series of lessons, I set out to prove that the average investor can evaluate
the balance sheet of a company, and following a few relatively simple
calculations, arrive at what they believe is the “real”, or intrinsic value of the
company. This will allow a person to look at a stock and know that it is worth, for
instance, $40 per share. This gives each investor the freedom to know when a
security is undervalued, increasing their long-term returns substantially.
Before we examine how to value a company, it is important to understand the
nature of businesses and the stock market. This is the cornerstone of learning to
invest well.
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1.2 Primary Market
The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions
can obtain funding through the sale of a new stock or bond issue. This is typically
done through a syndicate of securities dealers. The process of selling new issues
to investors is called underwriting. In the case of a new stock issue, this sale is
an initial public offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the prospectus.
Features of Primary Market:
This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore it is
also called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates to the
investors.
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions. Borrowers
in the new issue market may be raising capital for converting private capital
into public capital; this is known as "going public."
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1.3 Secondary Market
The secondary market is an on-going market, which is equipped and organized
with a place, facilities and other resources required for trading securities after
their initial offering. It refers to a specific place where securities transaction
among many and unspecified persons is carried out through intermediation of the
securities firms, i.e., a licensed broker, and the exchanges, a specialized trading
organization, in accordance with the rules and regulations established by the
exchanges.
A bit about history of stock exchange they say it was under a tree that it all
started in 1875.Bombay Stock Exchange (BSE) was the major exchange in India till
1994.National Stock Exchange (NSE) started operations in 1994.
NSE was the first to introduce electronic screen based trading. BSE was forced to
follow suit. The present day trading platform is transparent and gives investors
prices on a real time basis. With the introduction of depository and mandatory
dematerialization of shares chances of fraud reduced further. The trading screen
gives you top 5 buy and sell quotes on every scrip.
A typical trading day starts at 9 ending at 3.30. Monday to Friday. BSE has 30
stocks which make up the Sensex .NSE has 50 stocks in its index called Nifty. FII s
Banks, financial institutions mutual funds are biggest players in the market. Then
there are the retail investors and speculators. The last ones are the ones who
follow the market morning to evening; Market can be very addictive like blogging
though stakes are higher in the former.
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2. Secondary Market
2.1 Meaning & Definition
The secondary market, also known as the aftermarket, is the financial
market where previously issued securities and financial instruments such
as stock, bonds, options, and futures are bought and sold. The term "secondary
market" is also used to refer to the market for any used goods or assets, or an
alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food
production and feedstock, but a "second" or "third" market has developed for use
in ethanol production). Another commonly referred to usage of secondary market
term is to refer to loans which are sold by a mortgage bank to investors .
The secondary market for a variety of assets can
vary from loans to stocks, from fragmented to
centralized, and from illiquid to very liquid. The
major stock exchanges are the most visible
example of liquid secondary markets - in this case,
for stocks of publicly traded companies. Exchanges
such as the New York Stock Exchange, Nasdaq and
the American Stock Exchange provide a
centralized, liquid secondary market for the
investors who own stocks that trade on those
exchanges. Most bonds and structured products trade “over the counter,” or by
phoning the bond desk of one’s broker-dealer. Loans sometimes trade online
using a Loan Exchange.
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2.2 History of Stock Exchange
Do you know that the world's foremost marketplace New York Stock Exchange
(NYSE), started its trading under a tree (now known as 68 Wall Street) over 200
years ago? Similarly, India's premier stock exchange Bombay Stock Exchange (BSE)
can also trace back its origin to as far as 125 years when it started as a voluntary
non-profit making association.
News on the stock market appears in different media every day. You hear about it
any time it reaches a new high or a new low, and you also hear about it daily in
statements like 'The BSE Sensitive Index rose 5% today'. Obviously, stocks and
stock markets are important. Stocks of public limited companies are bought and
sold at a stock exchange. But what really are stock exchanges? Known also as the
stock market or bourse, a stock exchange is an organized marketplace for
securities featured by the centralization of supply and demand for the transaction
of orders by member brokers, for institutional and individual investors.
The exchange makes buying and selling easy. For example, you don't have to
actually go to a stock exchange, say, BSE - you can contact a broker, who does
business with the BSE, and he or she will buy or sell your stock on your behalf.
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2.3 Origin of Indian Stock Market
The origin of the stock market in India goes back to the end of the eighteenth
century when long-term negotiable securities were first issued. However, for all
practical purposes, the real beginning occurred in the middle of the nineteenth
century after the enactment of the companies Act in 1850, which introduced the
features of limited liability and generated investor interest in corporate securities.
An important early event in the development of the stock market in India was the
formation of the native share and stock brokers 'Association at Bombay in 1875,
the precursor of the present day Bombay Stock Exchange. This was followed by
the formation of associations/exchanges in Ahmadabad (1894), Calcutta (1908),
and Madras (1937). In addition, a large number of ephemeral exchanges emerged
mainly in buoyant periods to recede into oblivion during depressing times
subsequently.
Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life.
Without a stock exchange, the saving of the community- the sinews of economic
progress and productive efficiency- would remain underutilized. The task of
mobilization and allocation of savings could be attempted in the old days by a
much less specialized institution than the stock exchanges. But as business and
industry expanded and the economy assumed more complex nature, the need for
'permanent finance' arose. Entrepreneurs needed money for long term whereas
investors demanded liquidity – the facility to convert their investment into cash at
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any given time. The answer was a ready market for investments and this was how
the stock exchange came into being.
Stock exchange means any body of individuals, whether incorporated or not,
constituted for the purpose of regulating or controlling the business of buying,
selling or dealing in securities. These securities include:
(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of
a like nature in or of any incorporated company or other body corporate.
(ii)Government securities.
(iii) Rights or interest in securities.
The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd
(NSE) are the two primary exchanges in India. In addition, there are 22 Regional
Stock Exchanges. However, the BSE and NSE have established themselves as the
two leading exchanges and account for about 80 per cent of the equity volume
traded in India. The NSE and BSE are equal in size in terms of daily traded volume.
The average daily turnover at the exchanges has increased from Rs 851 crore in
1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000
(April - August 1999). NSE has around 1500 shares listed with a total market
capitalization of around Rs 9, 21,500 crore.
The BSE has over 6000 stocks listed and has a market capitalization of around Rs
9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the
investor could buy them on either exchange. Both exchanges have a different
settlement cycle, which allows investors to shift their positions on the bourses.
The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE
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50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and
more widely followed index.
Both these indices are calculated on the basis of market capitalization and contain
the heavily traded shares from key sectors. The markets are closed on Saturdays
and Sundays. Both the exchanges have switched over from the open outcry
trading system to a fully automated computerized mode of trading known as
BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading)
System.
It facilitates more efficient processing, automatic order matching, faster execution
of trades and transparency; the scrip's traded on the BSE have been classified into
'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which
are in the carry forward system (Badla). The 'F' group represents the debt market
(fixed income securities) segment. The 'Z' group scrip's are the blacklisted
companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups
and Rights renunciations. The key regulator governing Stock Exchanges, Brokers,
Depositories, Depository participants, Mutual Funds, FIIs and other participants in
Indian secondary and primary market is the Securities and Exchange Board of
India (SEBI) Ltd.
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1. Traditional Structure of Indian Stock Exchange
According to legal structure, the Stock Exchange in India could be separated
into
2 broad groups
20 stock exchanges which were set up as companies, either limited by
guarantees or by shares
3 stock exchanges which are functioning as associations of persons
(AOP) viz. BSE, NSE and Madhya Pradesh Stock Exchange
The 20 stock exchanges which are companies are the stock exchanges of:
Bangalore Stock Exchange Ludhiana Stock Exchange
Bhubaneswar Stock Exchange Madras Stock Exchange
Calcutta Stock Exchange Magadh Stock Exchange
Cochin Stock Exchange Mangalore Stock Exchange
Coimbatore Stock Exchange NSE Stock Exchange
Delhi Stock Exchange Pune Stock Exchange
Gauhati Stock Exchange OTCEI Stock Exchange
Hyderabad Stock Exchange Saurashtra-Kutch Stock Exchange
Interconnected Stock Exchange Uttar Pradesh Stock Exchange
Jaipur Stock Exchange Vadodara Stock Exchange
Apart from NSE, all stock exchanges whether established as corporate bodies or
Association of Persons (AOPs), are non-profit making organizations.
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2. Demutualization of Stock Exchanges
The transactions process of an exchange from a “mutually-owned” association to
a company “owned by shareholders” is called demutualization. In other words,
transforming the legal structure, of an exchange from a mutual form to a business
corporation form is referred to as demutualization. The demutualized Stock
Exchange in India are:
The National Stock Exchange (NSE)
Over the Counter Exchange of India (OTCEI)
3. Corporation of Stock Exchanges
Corporation of Stock Exchanges is the process of converting the organizational
structure of the stock exchange from a non-corporate structure to a corporate
structure. Traditionally, some of the stock exchanges in India were established as
"Association of persons", like BSE, ASE and MPSE. Corporation of these exchanges
is the process of converting them into incorporated Companies.
4. Management of Stock Exchange
The recognized stock exchanges are managed by “Governing Board”. The
governing board consists of elected member directors from stock broker
members, public representatives and government nominees nominated by the
SEBI.
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The government has also power to nominate President and Vice-President of
stock exchange and to approve the appointment of the Chief Executive and public
representatives. The major stock exchanges are managed by the Chief Executive
Officer and the smaller stock exchanges are under the control of secretary.
The Governing Boards have power such as:
Selection of office bearers and setting up of committees like Listing
Committee, Arbitration Committee, Defaulters Committee, etc.,
Admission or expulsion of members,
Management of the properties and finances of the exchange,
Framing and interpretation of rules, bye-laws etc. for the regulation of
stock exchange,
Adjudication of disputes among members or outsiders,
Management of the affairs of the exchange in the best interest of the
investors and public interest.
5. Membership
To become a member of a recognized stock exchange, a person must posses the
following qualifications:
He should be a citizen of India,
He should not be less than 21 year of age,
He should not have been adjudged bankrupt or insolvent,
He should not have been convicted for an offence involving fraud or
dishonesty.
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He should not be engaged in any other business except dealing in
securities,
He should not have been expelled by any other stock exchange or
declared a defaulter by any other stock exchange.
Apart from individuals, a company is also eligible to become a member provided it
satisfies the conditions imposed by the stock exchange concerned.
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2.4 Features of Stock Exchange
Organized Market
Stock exchange is an organized market. It deals with the securities such as shares,
debentures and bonds. It provides common platform to the members of the
exchange for carrying out transactions in securities. The transaction is carried out
through the authorized broker or member of the stock exchange. It provides
ready market to securities.
Private Status
Stock exchange is an association of persons. It is a privately owned association.
Some of the stock exchanges are the joint stock companies, while some of them
are association of persons. The stock exchange should be registered with the
government.
Government Control
Stock exchange operates under the control of the government. Today SEBI has
been controlling stock exchange in India. There are wide powers granted to SEBI
by the government to regulate and control the stock exchange, particularly after
securities scams.
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Rules & Regulations
Stock exchange is an organized market which operated under well defined rules &
regulations. Every stock exchange has it’s own constitutions, bye-laws with
managing body for orderly functioning of the exchange. The bye- laws contain
detailed rules & regulations for carrying out securities transactions.
Security Contracts
Every transaction entered into by the parties in the stock exchange is a contract
governed under the Securities Contracts (Regulation) Act, 1956. Therefore, the
provision of the Securities Contract Act, have to be followed in day to day
operations of the stock exchange.
Nerve Center of Economy
Stock exchange considered as a nerve center of the economy of any country. It is
connected with the saving, investment and capital formation in the country. The
country’s economy is closely connected with the performance of the stock
market.
Sensitive
Stock exchange are sensitive to the economic, political and social evens in the
country as well as world events such as war, earthquake, flood, political charge,
economic crisis affect the stock prices.
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2.5 Functions of Stock Exchanges
The stock market occupies a pivotal position in the financial system. It performs
several economic functions and renders invaluable services to the investors,
companies, and to the economy as a whole. These are summarized as follows:
Liquidity & Marketability of Securities
Stock exchange provides liquidity to the securities since securities can be
converted in to cash at any time according to the discretion of the investor by
selling them at listed price. They facilitates buying and selling of the securities at
listed price by providing continuous marketability to the investors in respect of
securities they hold intended to hold. Thus, they create a ready outlet for dealing
in securities.
Safety of Funds
Stock exchange ensures safety of funds invested because they have to function
under strict rules and regulation and bye-laws are meant to ensure safety of
investible funds. Overtrading, illegitimate speculations, etc. are prevented
through carefully designed set of rules. This would strengthen the investor’s
confidence and promote large investment.
Supply of Long Term Funds
The securities traded in the stock market are negotiable and transferable in
character and such as they can be transferred with minimum of formalities from
one hand to another, but company is assured of long term availability of funds.
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Flow of Capital to Profitable Ventures
The profitability and popularity of companies are reflected in stock prices. The
price quoted indicates the relative profitability and performance of the
companies and this facilitates the flow of capital in profitable channels.
Reflection of Business Cycle
The changing business conditions in the economy are immediately reflects
through capital formation. But for these stock exchanges, surplus funds
available with individuals and institutions would not have gone for productive
and remunerative ventures.
Speculations
The stock exchange helps to make speculations in the market. Healthy
speculations keep the exchange active. Normal speculations are not harmful
but it provides more business to the exchanges. Therefore, stock exchanges
encourage speculations in securities.
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2.6 Products deals in Secondary Market
Equity Shares:
An equity share, commonly referred to as ordinary share also represents the form
of fractional ownership in which a shareholder, as a fractional owner, undertakes
the maximum entrepreneurial risk associated with a business venture. The
holders of such shares are members of the company and have voting rights.
Rights Issue / Rights Shares:
The issue of new securities to existing shareholders at a ratio to those already
held.
Bonus Shares:
Shares issued by the companies to their shareholders free of cost by capitalization
of accumulated reserves from the profits earned in the earlier years.
Preferred Stock / Preference shares:
Owners of these kinds of shares are entitled to a fixed dividend or dividend
calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity share. They also enjoy priority over the equity shareholders in
payment of surplus. But in the event of liquidation, their claims rank below the
claims of the company’s creditors, bondholders / debenture holders.
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Cumulative Preference Shares:
A type of preference shares on which dividend accumulates if remains unpaid. All
arrears of preference dividend have to be paid out before paying dividend on
equity shares.
Cumulative Convertible Preference Shares:
A type of preference shares where the dividend payable on the same
accumulates, if not paid. After a specified date, these shares will be converted
into equity capital of the company.
Participating Preference Share:
The right of certain preference shareholders to participate in profits after a
specified fixed dividend contracted for is paid. Participation right is linked with
the quantum of dividend paid on the equity shares over and above a particular
specified level.
Security Receipts:
Security receipt means a receipt or other security, issued by a securitisation
company or reconstruction company to any qualified institutional buyer pursuant
to a scheme, evidencing the purchase or acquisition by the holder thereof, of an
undivided right, title or interest in the financial asset involved in securitisation.
Government securities:
These are credit risk-free coupon bearing instruments which are issued by the
Reserve Bank of India on behalf of Government of India, in lieu of the Central
Page | 19
Government's market borrowing programme. These securities have a fixed
coupon that is paid on specific dates on half-yearly basis. These securities are
available in wide range of maturity dates, from short dated (less than one year) to
long dated (up to twenty years).
Debentures:
Bonds issued by a company bearing a fixed rate of interest usually payable half
yearly on specific dates and principal amount repayable on particular date on
redemption of the debentures. Debentures are normally secured / charged
against the asset of the company in favour of debenture holder.
Bond:
A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt
security is generally issued by a company, municipality or government agency. A
bond investor lends money to the issuer and in exchange, the issuer promises to
repay the loan amount on a specified maturity date. The issuer usually pays the
bond holder periodic interest payments over the life of the loan.
Commercial Paper:
A short term promise to repay a fixed amount that is placed on the market either
directly or through a specialized intermediary. It is usually issued by companies
with a high credit standing in the form of a promissory note redeemable at par to
the holder on maturity and therefore, doesn’t require any guarantee. Commercial
paper is a money market instrument issued normally for tenure of 90 days.
Treasury Bills:
Short-term (up to 91 days) bearer discount security issued by the Government as
a means of financing its cash requirements.
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2.8 Services of Stock Exchanges
Stock Exchange provides variety of services which are useful to the following
parties:
1. Services to the Investors
Investors in the country are the important component in secondary market. They
invest their savings in the stock market in order to get more return on their
investment. The stock exchange provides the following services to these
investors:
Liquidity to their investment is ensured by enabling them to sell securities
whenever they need liquid funds.
Information about the prices of securities listed on the exchange through
daily quotations.
Safety and security to the transactions entered into by the investor in the
market.
Better price for the securities through the sensitive and continuous
operations.
Guidance to the investors regarding the choice of security to be purchased.
Wide market is provided to the listed securities with the help of large
number of brokers, investors and market makers.
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2. Services to The Companies
The stock exchange acts as financial intermediary between the corporate sector
and the investors in the country. Companies need capital which is raised from the
public through public issues. The public issues are successful because of the
services rendered by the stock exchanges. The securities issued by the companies
are exchanged in the stock market. Thus, the following services are rendered by
the stock exchanges to the companies:
Wide market for the listed securities.
Enhance the goodwill and the reputation of the companies who have
listed their securities with the exchange.
Facilitate fair pricing of the listed securities.
Provide better response from the investors for the public issues.
Facilities for selling securities quickly and easily.
Maintaining the confidence of the investors in the capital market.
Facilitates high valuation of the securities at the time of merger,
amalgamation, etc.
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3. Services to The Community
The stock exchange plays a very important role in the country. It involves
investors, companies, government and financial intermediaries. Therefore, it
also provides the following valuable services to the economy or community:
It encourages the savings habit among the people in the country.
It helps to achieve capital formation and economic development.
It also helps to diversify investments in the profitable manner.
It provides the medium of evaluation regarding the worth of different
securities listed in market.
It also enables companies to raise capital and thereby provide
employment opportunities for the people in the country.
It also helps the consumers in the country to meet their needs from the
goods or services provided by the listed companies.
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2.9 Regulation Business of Stock Exchange
Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of
stock exchanges. The SEBI has been inspecting the stock exchanges once every
year since 1995-96. During these inspections, a review of the market operations,
organizational structure and administrative control of the exchange is made to
ascertain whether:
The exchange provides a fair, equitable and growing market to investors.
The exchange's organization, systems and practices are in accordance
with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules
framed there under.
The exchange has implemented the directions, guidelines and instructions
issued by the SEBI from time to time.
The exchange has complied with the conditions, if any, imposed on it at
the time of renewal/ grant of its recognition under section 4 of the SC(R)
Act, 1956.
During the year 1997-98, inspection of stock exchanges was carried out with a
special focus on the measures taken by the stock exchanges for investor's
protection. Stock exchanges were, through inspection reports, advised to
effectively follow-up and redress the investors' complaints against
members/listed companies. The stock exchanges were also advised to expedite
the disposal of arbitration cases within four months from the date of filing.
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During the earlier years' inspections, common deficiencies observed in the
functioning of the exchanges were delays in post trading settlement, frequent
clubbing of settlements, delay in conducting auctions, inadequate monitoring of
payment of margins by brokers, non-adherence to Capital Adequacy Norms etc. It
was observed during the inspections conducted in 1997-98 that there has been
considerable improvement in most of the areas, especially in trading, settlement,
collection of margins etc.
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2.10 SEBI and its role in Secondary Market
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. The following departments of SEBI take care of
the activities in the secondary market.
Sr.No. Name of the
Department
Major Activities
1. Market Intermediaries
Registration and
Supervision department
(MIRSD)
Registration, supervision, compliance
monitoring and inspections of all market
intermediaries in respect of all segments of
the markets viz. equity, equity derivatives,
debt and debt related derivatives.
2. Market Regulation
Department (MRD)
Formulating new policies and supervising the
functioning and operations (except relating
to derivatives) of securities exchanges, their
subsidiaries, and market institutions such as
Clearing and settlement organizations and
Depositories (Collectively referred to as
‘Market SROs’.)
3. Derivatives and New
Products Departments
(DNPD)
Supervising trading at derivatives segments
of stock exchanges, introducing new products
to be traded, and consequent policy changes.
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2.11 Weakness of Stock Exchanges in India
Excessive Speculation
It has been estimated that genuine investment transactions represent hardly 10
percent of the total transaction. Speculation to certain extent keeps the market
active. However, excessive speculations are undesirable and dangerous. The
character of Indian stock market has been undergoing a distinct change in recent
years, from a saving and investment center for investors to a playground for
speculators. This situation is alarming; SEBI appears to be a helpless watchdog in
this regard. The excessive speculation must be stopped effectively.
Lack of Professionalism in the Functioning
Indian stock exchange operates in traditional line. The methods used are old and
outdated. The operators are not well trained and professional in their approach.
This affects the liquidity and volume of business. The openness in the transactions
is also limited.
Ineffective Regulation or Stock Exchange
In India, self regulation of stock exchange is limited. Even the eternal regulation
through SEBI and Government is not effective. Security scams, excessive
speculations and wide variations in shares price are the indicators of ineffective
regulations of Indian Stock Exchanges.
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Unethical Practices
Unethical practices are followed by brokers and other operators in the stock
market. Moreover, strict actions are also not taken against such operators. As a
result, such undesirable practices continue without any check.
Domination of Foreign Buyers and Financial Institutions
Indian stock exchanges are dominated by financial institutions and influential
buyers including foreign buyers. Their purchase, sales decisions affects the mood
of the market. Stock exchange price index goes up when foreign buyers purchase
securities in large scale. It also comes down when such support is not available.
Absence of Outside Representation
There is not outside representation on the governing bodies of exchanges except
government nominees. Such representation is necessary for democratic
management of stock exchanges. This will be useful for better self regulation of
stock exchanges.
Absence of Openness in the Operations
Openness is practically absent in the working of Indian stock exchanges. This
secrecy affects the free and fair working of exchanges. Brokers and financial
institutions keep secrecy as regards their transactions.
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Periodical Crises
Stock Exchange in India has to face periodical crisis due to lack of effective control
on the activities and operations of dealers. Securities scams are the best example
of this.
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2.12 Stock Exchange Terms
Bull:
Bull is a speculator on the stock exchange who expects a rise in the price of a
certain security. He buys the security to sell it in future when the price goes up. It
is also called as “Tejiwala”.
Bear:
Bear is also a kind of speculator on the stock exchange who expects a fall in the
price of securities. In order to take the benefits of future situation, he agrees to
sell for delivery on a fixed dates such securities which are not in his possession.
Before the delivery date, he purchases securities at a lower price and settles his
deal at a higher price and earns profit. A bear is also called “Mandiwala”.
Speculations:
Speculation is an anti-social activity undertaken for the profit maximization.
Speculators estimate the possible future trend in the stock exchange and makes
transactions in the present period.
Scriptless Trading:
This means trading in electronic shares where there are no physical certificates.
Such trading is safe, quick and to the benefit of investors. Its use is restricted to
those stock exchanges which have electronic clearing houses.
Dematerialization:
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It is a process by which an investor get his physical share certificates converted
into electronic shares maintain in his account with the participant in the
depository system.
Depository:
A depository is like a bank wherein the deposits are securities such as shares,
debentures, bonds, government securities, units, etc in electronic form.
Custodian:
A Custodian is basically an organization which helps register and safeguard the
securities of the clients.
3. BOMBAY STOCK EXCHANGE (BSE)
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The Bombay Stock Exchange is the oldest stock exchange in Asia and has the
greatest number of listed companies in the world, with more than 4850 listed as
of December 2009. It is located at Dalal Street, Mumbai, India. On 31 December
2009, the equity market capitalization of the companies listed on the BSE was US$
1.79 trillion, making it the largest stock exchange in South Asia and the 12th
largest in the world. With over 4850 Indian companies listed on the stock
exchange it has a significant trading
volume. The BSE SENSEX also called
the "BSE 30", is a widely used market
index in India and Asia. Though many
other exchanges exist, BSE and the
National Stock Exchange of India
account for most of the trading in
shares in India.
1) Hours of operation:
The hours of operation for the BSE quoted above are stated in terms of the
local time (i.e. GMT +5:30) in Mumbai (Bombay), India. BSE's normal trading
sessions are on all days of the week except Saturdays, Sundays and holidays
declared by the Exchange in advance.
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2) History
The Bombay Stock Exchange is
known as the oldest exchange in Asia. It traces its history to the 1850s, when
stockbrokers would gather under banyan trees in front of Mumbai's Town Hall.
The location of these meetings changed many times, as the number of brokers
constantly increased. The group eventually moved to Dalal Street in 1874 and in
1875 became an official organization known as 'The Native Share & Stock Brokers
Association.
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Sr. No. Session Timing
1 Beginning of the Day Session 8:00 - 9:00
2 Trading Session 9:00 - 15:30
3 Position Transfer Session 15:30 - 15:50
4 Closing Session 15:50 - 16:05
5 Option Exercise Session 16:05 - 16:35
6 Margin Session 16:35 - 16:50
7 Query Session 16:50 - 17:35
8 End of Day Session 17:35
In 1956, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. The Bombay Stock
Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure
overall performance of the exchange. In 2000 the BSE used this index to open its
derivatives market, trading Sensex futures contracts. The development of Sensex
options along with equity derivatives followed in 2001 and 2002, expanding the
BSE's trading platform. Historically an open-cry floor trading exchange, the
Bombay Stock Exchange switched to an electronic trading system in 1995. It took
the exchange only fifty days to make this transition.
3) Services
BSE provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in more
than 359 cities and towns of India. BSE has always been at par with the
international standards. The systems and processes are designed to safeguard
market integrity and enhance transparency in operations. BSE is the first
exchange in India and the second in the world to obtain an ISO 9001:2000
certifications.
BSE continues to innovate. In recent times, it has become the first national level
stock exchange to launch its website in Gujarati and Hindi to reach out to a larger
number of investors. It has successfully launched a reporting platform for
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corporate bonds in India christened the ICDM or Indian Corporate Debt Market
and a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables
information dissemination to the common man on the street.
In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase
transparency in the Indian capital market. While the Directors Database provides
a single-point access to information on the boards of directors of listed
companies, the ICERS facilitates the corporate in sharing with BSE their corporate
announcements.
4) Investor Services
The Department of Investor Services redresses grievances of investors. BSE was
the first exchange in the country to provide an amount of Rs.1 million towards the
investor protection fund; it is an amount higher than that of any exchange in the
country. BSE launched a nationwide investor awareness programme- 'Safe
Investing in the Stock Market' under which 264 programmes were held in more
than 200 cities.
5) BSE On-line Trading (BOLT)
BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities.
BOLT is currently operating in 25,000 Trader Workstations located across over
359 cities in India.
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6) BSEWEBX.com
In February 2001, BSE introduced the world's first centralized exchange-based
Internet trading system, BSEWEBX.com. This initiative enables investors
anywhere in the world to trade on the BSE platform.
7) BSE indices
For the premier stock exchange that pioneered the securities transaction
business in India, over a century of experience is a proud achievement. A lot has
changed since 1875 when 318 persons by paying a then princely amount of Re. 1,
became members of what today is called Bombay Stock Exchange Limited (BSE).
Over the decades, the stock market in the country has passed through good and
bad periods. The journey in the 20th century has not been an easy one. Till the
decade of eighties, there was no measure or scale that could precisely measure
the various ups and downs in the Indian stock market. BSE, in 1986, came out
with a Stock Index-SENSEX- that subsequently became the barometer of the
Indian stock market.
The launch of SENSEX in 1986 was later followed up in January 1989 by
introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks
listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi,
Ahmadabad and Madras. The BSE National Index was renamed BSE-100 Index
from October 14, 1996 and since then, it is being calculated taking into
consideration only the prices of stocks listed at BSE. BSE launched the dollar-
linked version of BSE-100 index on May 22, 2006.
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BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value
Ratio and the Dividend Yield Percentage on day-to-day basis of all its major
indices.
The values of all BSE indices are updated on real time basis during market hours
and displayed through the BOLT system, BSE website and news wire agencies.
All BSE Indices are reviewed periodically by the BSE Index Committee. This
Committee which comprises eminent independent finance professionals frames
the broad policy guidelines for the development and maintenance of all BSE
indices. The BSE Index Cell carries out the day-to-day maintenance of all indices
and conducts research on development of new indices.
8) Awards
The World Council of Corporate Governance has awarded the Golden
Peacock Global CSR Award for BSE's initiatives in Corporate Social
Responsibility (CSR).
The Annual Reports and Accounts of BSE for the year ended March 31,
2006 and March 31 2007 have been awarded the ICAI awards for
excellence in financial reporting.
The Human Resource Management at BSE has won the Asia - Pacific HRM
awards for its efforts in employer branding through talent management at
work, health management at work and excellence in HR through
technology
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4. NATIONAL STOCK EXCHANGE (NSE)
Introduction
The National Stock Exchange of
India Limited (NSE), is a Mumbai-
based stock exchange. It is the
largest stock exchange in India
in terms of daily turnover and
number of trades, for both equities
and derivative trading. NSE has a
market capitalization of around Rs
47,01,923 crore (7 August 2009) and
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is expected to become the biggest
stock exchange in India in terms of
market capitalization by 2009 end
Though a number of other exchanges
exist, NSE and the Bombay Stock
Exchange are the two most significant
stock exchanges in India, and
between them are responsible for the
vast majority of share transactions. The NSE's key index is the S&P CNX Nifty,
known as the Nifty, an index of fifty major stocks weighted by market
capitalization.
NSE is mutually-owned by a set of leading financial institutions, banks, insurance
companies and other financial intermediaries in India but its ownership and
management operate as separate entities. There are at least 2 foreign investors
NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. As of
2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across
India. In October 2007, the equity market capitalization of the companies listed
on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in
South Asia. NSE is the third largest Stock Exchange in the world in terms of the
number of trades in equities. It is the second fastest growing stock exchange in
the world with a recorded.
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1. Origins
The National Stock Exchange of India was promoted by leading financial
institutions at the best of the Government of India, and was incorporated in
November 1992 as a tax-paying company. In April 1993, it was recognized as a
stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE
commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment of the NSE commenced operations in
November 1994, while operations in the Derivatives segment commenced in June
2000.
2. Innovations
NSE has remained in the forefront of modernization of India's capital and financial
markets, and its pioneering efforts include:
Being the first national, anonymous, electronic limit order book (LOB)
exchange to trade securities in India. Since the success of the NSE, existent
market and new market structures have followed the "NSE" model.
Setting up the first clearing corporation "National Securities Clearing
Corporation Ltd." in India. NSCCL was a landmark in providing innovation on
all spot equity market (and later, derivatives market) trades in India.
Co-promoting and setting up of National Securities Depository Limited, first
depository in India.
Setting up of S&P CNX Nifty.
NSE pioneered commencement of Internet Trading in February 2000, which
led to the wide popularization of the NSE in the broker community.
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Being the first exchange that, in 1996, proposed exchange traded
derivatives, particularly on an equity index, in India. After four years of
policy and regulatory debate and formulation, the NSE was permitted to
start trading equity derivatives
Being the first and the only exchange to trade GOLD ETFs (exchange traded
funds) in India.
NSE has also launched the NSE-CNBC-TV18 media centre in association with
CNBC-TV18.
3. Markets
Currently, NSE has the following major segments of the capital market
Equity
Futures and Options
Retail Debt Market
Wholesale Debt Market
Currency futures
NSE became the first stock exchange to get approval for Interest rate futures as
recommended by SEBI-RBI committee, on 31 August,2009, a futures contract
based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly
maturities.
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4. Hours
NSE's normal trading sessions are conducted from 9:00 am India Time to 3:30 pm
India Time on all days of the week except Saturdays, Sundays and Official Holidays
declared by the Exchange (or by the Government of India) in advance. The
exchange in association with BSE (Bombay Stock Exchange Ltd.,) thinking to revise
its timings from 9.00 am India Time till 5.00 pm India Time.
There were System Testing going on and opinions, suggestions or feedback on the
New Proposed Timings are being invited from the brokers across India. And finally
on Nov 18, 2009 regulator decided to drop their ambitious goal of longest Asia
Trading Hours due to strong opposition from its members.
On December 16, 2009, NSE announced that it would pre-pone the market
opening at 9am from Dec 18, 2009. So NSE trading hours will be from 9:00 am till
3:30 pm India Time.
However, on December 17, 2009, after strong protests from brokers, the
Exchange decided to postpone the change in trading hours till Jan 04, 2010. NSE
new market timing from Jan 04, 2010 is 9:00 am till 3:30 pm India Time.
5. Indices
NSE also set up as index services firm known as India Index Services & Products
Limited (IISL) and has launched several stock indices, including:
S&P CNX Nifty(Standard & Poor's CRISIL NSE Index)
CNX Nifty Junior
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CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)
S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)
CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)
6. Certifications
NSE also conducts online examination and awards certification, under its
programmers of NSE's Certification in Financial Markets (NCFM). Currently,
certifications are available in 19 modules, covering different sectors of financial
and capital markets. Branches of the NSE are located throughout India.
5. LISTING OF SECURITIES
5.1 Meaning & Definition:
Listing means admission of securities to dealings on a recognized stock exchange.
The securities may be of any public limited company, Central or State
Government, quasi governmental and other financial institutions/corporations,
municipalities, etc.
The objectives of listing are mainly to:
Provide liquidity to securities
Mobilize savings for economic development;
Protect interest of investors by ensuring full disclosures.
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The Bombay Stock Exchange (BSE) has a dedicated Listing Department to grant
approval for listing of securities of companies in accordance with the provisions of
the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation)
Rules, 1957, Companies Act, 1956, Guidelines issued by Security Exchange Board
of India (SEBI) and Rules, Bye-laws and Regulations of BSE.
BSE has set various guidelines and forms that need to be adhered to and
submitted by the companies. These guidelines will help companies to expedite
the fulfillment of the various formalities and disclosure requirements that are
required at various stages of
Public Issues
Initial Public Offering
Further Public Offering
Preferential Issues
Indian Depository Receipts
Amalgamation
Qualified Institutions Placements
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5.2 Classification of Listing
1. Group "A" Shares
These are referred to as “Cleaned Securities” or “Specified shares". The
facility for carrying forward a transaction from one account period to
another is available for these shares. Group "A" shares represent
companies, with huge amount of capital, and equally a large scope for
investment. These shares are frequently traded and command higher price
earning multiples.
2. Group “B” Shares
These are referred to as “None cleaned securities” or “Non-specified
shares”. For these groups facility of carrying forward is not available.
Whenever a share is moved from Group "B" to Group "A" its market price
rises; likewise, when a share is shifted from Group "A" to Group "B", its
market price declines. There are some criteria and guide lines, laid down by
stock exchange, for shifting stocks from the non-specified list to the
specified list.
3. Group “C” Shares
Under group “C”, only odd lots and permitted securities are included. A
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number of shares that are less then the market lot are known as odd lots.
Old lots have settlement once in a fortnight.
5.3 Advantages
Facilitates Buying & Selling Securities
Listing gives way for easy buying and selling of securities. Constant marketing
facilities are assured
for listed securities.
Ensures
Liquidity
The prices of listed
securities are quoted
daily in the market.
Hence securities can be converted in to cash readily at quoted price and thus
listing ensures liquidity.
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Offers wide Publicity
Listed securities give wide publicity to the company concerned. It is also because
the name of the listed companies are frequently mentioned in the stock market
reports, TV, Newspapers and Radios, etc. this has an advertising effect for such
companies and this will automatically widen the market for their securities.
Assures Finance
The very fact that a security is listed in a recognized stock exchange adds the
prestige of that company and it enables the company to raise the necessary
finance by the issue of such securities.
Enables Borrowing
Listed securities are preferred as collateral securities by commercial banks and
other lending institutions because they are rated high in the market quotation
and there is a ready market for them also. Thus borrowings are made easier
against the securities of the listed companies.
Protect Investors
Listing companies have to necessarily submit themselves to the various regulatory
measures by disclosing vital information about their assets, capital structure,
profits, dividend policy, allotment procedure, bonuses etc. hence, listing aims at
protecting the interest of investors to a great extent.
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5.4 Disadvantages of Listing
Leads to Speculations
Listed securities offer wide scope for the speculators to manipulate the values in
such a way as may be detrimental to the interest of the company. In such
situation, artificial forces play a more dominant role than the free market forces.
Because of this the stock market may not reflect the true picture of listed
securities.
Degrades Company’s Reputation
Some times listed securities are subject to wide fluctuation in their values. They
may become a victim of depression. They are immediately reflected on the stock
exchange whereas unlisted securities escape from the misery. These wide
fluctuations in their values have the effect of degrading the company’s reputation
and image in the eyes of the public as well the financial intermediaries.
Discloses Vital Information to Competitors
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For getting the securities listed a company has to disclose vital information such
as, dividend and bonuses declared, a brief history of the company, sales,
remuneration to managerial personnel and so on. Because of this may be there
are chances of leaking of secrecy of the company’s operations to trade rivals.
5.5Listing Procedures
As earlier said, listing enables a company to include its securities in the official list
of one or more recognized stock exchanges for the purpose of trading. A company
which requires its securities to be listed must comply with the following
formalities:
The company concerned must apply in the prescribed form along with the
following documents and details:
Certified copies of Memorandum and Articles of Association, Prospectus or
Statement in Lieu of Prospectus, Underwriting agreements, agreements
with venders and promoters.
Specified copies of shares and debenture certificates, letter of call,
allotment, acceptance and renunciation.
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5.6 Criteria for Listing
Minimum Listing Requirements for New Companies
The following eligibility criteria have been prescribed effective August 1, 2006 for
listing of companies on BSE, through Initial Public Offerings (IPOs) & Follow-on
Public Offerings (FPOs):
1. Companies have been classified as large cap companies and small cap
companies. A large cap company is a company with a minimum issue size of Rs. 10
crore and market capitalization of not less than Rs. 25 crore. A small cap company
is a company other than a large cap company.
A. In respect of Large Cap Companies
i. The minimum post-issue paid-up capital of the applicant company
(hereinafter referred to as "the Company") shall be Rs. 3 crore.
ii. The minimum issue size shall be Rs. 10 crore.
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iii. The minimum market capitalization of the Company shall be Rs.
25 crore (market capitalization shall be calculated by multiplying
the post-issue paid-up number of equity shares with the issue
price).
B. In respect of Small Cap Companies
i. The minimum post-issue paid-up capital of the Company shall be
Rs. 3 crore.
ii. The minimum issue size shall be Rs. 3 crore.
iii. The minimum market capitalization of the Company shall be Rs. 5
crore (market capitalization shall be calculated by multiplying the
post-issue paid-up number of equity shares with the issue price)
iv. The minimum income/turnover of the Company shall be Rs. 3
crore in each of the preceding three 12-months period.
v. The minimum number of public shareholders after the issue shall
be 1000.
vi. A due diligence study may be conducted by an independent team
of Chartered Accountants or Merchant Bankers appointed by BSE,
the cost of which will be borne by the company. The requirement
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of a due diligence study may be waived if a financial institution or
a scheduled commercial bank has appraised the project in the
preceding 12 months.
2. For all companies :
a. In respect of the requirement of paid-up capital and market
capitalization, the issuers shall be required to include in the
disclaimer clause forming a part of the offer document that in the
event of the market capitalization (product of issue price and the
post issue number of shares) requirement of BSE not being met, the
securities of the issuer would not be listed on BSE.
b. The applicant, promoters and/or group companies, shall not be in
default in compliance of the listing agreement.
c. The above eligibility criteria would be in addition to the conditions
prescribed under SEBI (Disclosure and Investor Protection)
Guidelines, 2000.
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Minimum Listing Requirements for Companies already Listed on Other Stock Exchanges
The listing norms for companies already listed on other stock exchanges and
seeking listing at BSE, made effective from August 6, 2002, are as under:
1. The company shall have a minimum issued and paid up equity capital of
Rs. 3 crore.
2. The company shall have a profit making track record for the preceding
last three years. The revenues/profits arising out of extra ordinary items
or income from any source of non-recurring nature shall be excluded
while calculating the profit making track record.
3. Minimum net worth shall be Rs. 20 crore (net worth includes equity
capital and free reserves excluding revaluation reserves).
4. Minimum market capitalization of the listed capital shall be at least two
times of the paid up capital.
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5. The company shall have a dividend paying track record for at least the
last 3 consecutive years and the dividend should be at least 10% in each
year.
6. Minimum 25% of the company's issued capital shall be with Non-
Promoter shareholders as per Clause 35 of the Listing Agreement. Out of
above Non-Promoter holding, no single shareholder shall hold more
than 0.5% of the paid-up capital of the company individually or jointly
with others except in case of Banks/Financial Institutions/Foreign
Institutional Investors/Overseas Corporate Bodies and Non-Resident
Indians.
7. The company shall have at least two years listing record with any of the
Regional Stock Exchanges.
The company shall sign an agreement with CDSL and NSDL for demat trading.
Minimum Requirements for Companies Delisted by BSE seeking Relisting
on BSE
Companies delisted by BSE and seeking relisting at BSE are required to make a
fresh public offer and comply with the extant guidelines of SEBI and BSE regarding
initial public offerings.
Permission to Use the Name of BSE in an Issuer Company's Prospectus
Companies desiring to list their securities offered through a public issue are
required to obtain prior permission of BSE to use the name of BSE in their
prospectus or offer for sale documents before filing the same with the concerned
office of the Registrar of Companies. BSE has a Listing Committee, comprising of
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market experts, which decides upon the matter of granting permission to
companies to use the name of BSE in their prospectus/offer documents. This
Committee evaluates the promoters, company, project, financials, risk factors and
several other aspects before taking a decision in this regard. Decision with regard
to some types/sizes of companies has been delegated to the Internal Committee
of BSE.
1. Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of
its securities on BSE is required to submit a Letter of Application to all the
stock exchanges where it proposes to have its securities listed before filing
the prospectus with the Registrar of Companies.
2. Allotment of Securities
As per the Listing Agreement, a company is required to complete the
allotment of securities offered to the public within 30 days of the date of
closure of the subscription list and approach the Designated Stock
Exchange for approval of the basis of allotment.
In case of Book Building issues, allotment shall be made not later than 15
days from the closure of the issue, failing which interest at the rate of 15%
shall be paid to the investors.
3. Trading Permission
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As per SEBI Guidelines, an issuer company should complete the formalities
for trading at all the stock exchanges where the securities are to be listed
within 7 working days of finalization of the basis of allotment.
A company should scrupulously adhere to the time limit specified in SEBI
(Disclosure and Investor Protection) Guidelines 2000 for allotment of all
securities and dispatch of allotment letters/share certificates/credit in
depository accounts and refund orders and for obtaining the listing
permissions of all the exchanges whose names are stated in its prospectus
or offer document. In the event of listing permission to a company being
denied by any stock exchange where it had applied for listing of its
securities, the company cannot proceed with the allotment of shares.
However, the company may file an appeal before SEBI under Section 22 of
the Securities Contracts (Regulation) Act, 1956.
4. Requirement of 1% Security
Companies making public/rights issues are required to deposit 1% of the
issue amount with the Designated Stock Exchange before the issue opens.
This amount is liable to be forfeited in the event of the company not
resolving the complaints of investors regarding delay in sending refund
orders/share certificates, non-payment of commission to underwriters,
brokers, etc.
5. Payment of Listing Fees
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All companies listed on BSE are required to pay to BSE the Annual Listing
Fees by 30th April of every financial year as per the Schedule of Listing Fees
prescribed from time to time.
The schedule of Listing Fees for the year 2009-10, prescribed by the
Governing Board of BSE, is given here under:
SCHEDULE OF LISTING FEES FOR THE YEAR 2009-10
Securities * other than Privately Placed Debt Securities
Sr. No. Particulars Amount (Rs.)
1 Initial Listing Fees 20,000.00
2 Annual Listing Fees
(i) Companies with listed capital* up to Rs. 5 crore
(ii) Above Rs. 5 crore and up to Rs. 10 crore
(iii) Above Rs. 10 crore and up to Rs. 20 crore
Companies which have a listed capital* of more than Rs. 20 crore are required to pay an additional fee @ Rs. 750 for every additional Rs. 1 crore or part
10,000.00
15,000.00
30,000.00
45000.00
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thereof.
NOTE: In case of debenture capital (not convertible into equity shares), the fees will be 25% of the above fees.
*includes equity shares, preference shares, fully convertible debentures, partly convertible debentures and any other security convertible into equity shares.
Privately Placed Debt Securities
Sr. No.
Particulars Amount (Rs.)
1 Initial Listing Fee NIL
2 Annual Listing Fees i) Issue size up to Rs.5 crore
ii) Above Rs.5 crore and up to Rs.10 crore
iii) Above Rs.10 crore and up to Rs.20 crore
iv) Above Rs.20 crore
Rs. 2,500.00Rs.3,750.00Rs.7,500.00
Additional fee of Rs.200.00 for every additional Rs.1 crore or part thereof
Subject to a maximum of Rs.30,000.00 per instrument.
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The cap on the annual listing fee of debt instruments per issuer is Rs.5,00,000 per annum.
Mutual Funds
Particulars Amount (Rs.) Initial listing fee NIL
Annual Listing Fee: Full Year Less than 6 months
Issue size up to Rs.100 Crores 32,000 16,000
Above Rs.100 Crores and up to Rs.300 Crores.
58,000 29,000
Above Rs.300 Crores and up to Rs.500 Crores.
94,000 47,000
Above Rs.500 Crores and up to Rs. 1000 Crores
1,56,000 78,000
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Above 1000 Crores 2,50,000 1,25,000
Applicability:
The above schedule of Listing Fee is uniformly applicable for all companies
irrespective of whether BSE is the designated stock exchange or not.
Payment Date
The last date for payment of Listing Fee for the year 2009-10 is April 30, 2009.
Failure to pay the Listing Fee (for equity and/or debt segment) by the due date
will attract interest @ 12% per annum w.e.f. May 1, 2009.
Service Tax
Service Tax is payable on the listing fee at the applicable rates.
5.7 Obligations of Listing
A company whose securities have been listed on stock exchange has to perform
certain obligations also. Some of the important obligations given hereunder:
The date of the board of the board meeting at which the declaration or
recommendation of dividend or the issue of right or bonus share will be
considered.
Any change in company’s directorate or managerial personnel by death,
resignation, removal or otherwise.
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Any issue of new shares, rights shares or otherwise as well as the issue of
any privileges or bonuses to members, even before they are intimated to
shareholders.
Any change in the company’s capital structure.
Any material change in the general character or nature of the company’s
business.
Any re-issue of forfeited securities or the issue of any other securities
held in reserve for future issue.
Any action which will result in the redemption, cancelation or retirement
of any security listed on the stock exchange.
Any intention to make a drawing of the listed company.
Any other information necessary to enable the share holders to appraise
the company’s so as to avoid the establishment of a false market in the
shares of the company.
5.8 Listing Agreement
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The stock exchange authorities will scrutinize the applications carefully and if they
satisfied with all the particulars / documents submitted, they will call upon the
company to execute a Listing Agreement.
This agreement a list of conditions and obligations which the company should
strictly observe, failing which, the stock exchange may suspend or withdraw the
listing facility. Many conditions for listing of investors and to ensure that
applicants for large blocks of shares are
not given undue preference over
others.
5.8 Compliance with the Listing Agreement
Companies desirous of getting their securities listed at BSE are required to enter
into an agreement with BSE called the Listing Agreement, under which they are
required to make certain disclosures and perform certain acts, failing which the
company may face some disciplinary action, including suspension/delisting of
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securities. As such, the Listing Agreement is of great importance and is executed
under the common seal of a company. Under the Listing Agreement, a company
undertakes, amongst other things, to provide facilities for prompt transfer,
registration, sub-division and consolidation of securities; to give proper notice of
closure of transfer books and record dates, to forward 6 copies of unabridged
Annual Reports, Balance Sheets and Profit and Loss Accounts to BSE, to file
shareholding patterns and financial results on a quarterly basis; to intimate
promptly to the Exchange the happenings which are likely to materially affect the
financial performance of the Company and its stock prices, to comply with the
conditions of Corporate Governance, etc.
The Listing Department of BSE monitors the compliance by the companies with
the provisions of the Listing Agreement, especially with regard to timely payment
of annual listing fees, submission of results, shareholding patterns and corporate
governance reports on a quarterly basis. Penal action is taken against the
defaulting companies.
6. Stock Broker
6.1 Meaning & Definition
A broker is none other than a commission agent who transacts business in
securities on behalf of his clients who are non-members of a stock exchange.
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Thus, a non-member can purchase and sell securities only through a broker who is
a member of the stock exchange. To deal in securities on recognized stock
exchanges, the broker should register. A stock broker must possess the following
qualifications to register as a broker:
He must be a citizen with 21 years of age.
He should neither e a bankrupt not compounded with creditors
He should not have been convicted for any offence, fraud.
He should not have engaged in any other business other than that of a
broker in securities.
He should not have engaged in any other business other than that of a
broker in securities.
He should not be a defaulter of any stock exchange.
He should not be a defaulter of any stock exchange.
He should have completed 12th standard examination.
Apart from individuals, corporate and institutional members can also become
brokers. Brokers will be selected by the selection committee of the stock
exchange on the basis of their qualifications, experience, financial status, their
performance in the written test, interview etc.
6.2 Registration Procedure
The prospective broker must apply through the stock exchange of which
he is a member.
The stock exchange should forward the application within 30 days of
receipt of the application.
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After going through the application the security exchange board may call
for additional information or clarifications if necessary regarding the
dealings in securities. They may also request the applicant to appear
before it for personal representation.
After ascertaining whether the applicant is eligible to be admitted as a
member and whether he has the necessary infrastructure facilities, they
may grant a certificate to the stock broker. The stock exchanges
concerned will be duly informed of the same.
The certified stock broker must abide by the prescribed code of conduct.
The stock broker has to pay the prescribed registration fees.
The registration of a broker will be suspended if the broker violates and
provisions of the rules and regulations of the exchange and if he does not
follow the prescribed code of conduct.
The registration will be cancelled if the broker is convicted of a criminal
offence or guilty of fraud or if he repeatedly violates the provisions of the
rules and regulations of the stock exchange or the prescribed code of
conduct.
Every stock broker has to maintain a minimum amount of deposit called
security deposit or base minimum capital with the stock exchange.
6.3 Code of Conduct for Brokers
To discharge the duties on the best interest of investors and other stock brokers,
a code of conduct has been prescribed for brokers in accordance with the
statutory requirements. They have been briefly summarized below:
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A stock broker must honestly and promptly execute all orders for buying
and selling of securities of the best possible market price. He must make
prompt payment to his clients in the case of sales and prompt delivery in
the case of purchases.
He must issue a contract note for all transactions as specified by the
stock exchange without any delay.
He must maintain complete secrecy of his client s personal investments
and other information’s of a confidential nature.
He should not induce or initiate purchases or sales just for the sake of his
brokerage or commission.
He should not give any false or misleading information with a view to
encouraging purchases or sales and thereby getting his commission.
He should not entertain those clients who have failed to carry out their
commitments in respect of securities with other stock brokers.
The capacity in which he is acting must be duly informed to his client . In
other words, he must disclose whether he is acting as a principal or as an
agent. In all cases, he must give top priority to his client’s interest.
He is not expected to render ay investment advice except under those
circumstances which warrant it.
He must possess adequate infrastructure facilities and maintain proper
staff to render prompt, efficient and fair services to his clients.
He should not advertise his business publicly except when it is permitted
by the stock exchange.
He should not adopt any unfair practices with a view to attracting clients
from other brokers.
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He should not knowingly and willfully deliver documents which
constitute bad delivery.
He should not fail to submit the necessary returns to the stock exchange
as and when they have to be submitted as per the statutory regulations.
These returns should not contain any false or misleading information.
He must exercise reasonable care, diligence and skill in the discharge of
his functions as brokers.
He must maintain high standards of integrity and honesty, promptness
and fairness in the conduct of all his business.
Above all, he should not indulge in fraudulent or deceptive transactions
or spread rumors with a view to creating a false market and making
personal gains.
He must maintain proper books of account, records and documents as
required by the various regulating authorities.
He must produce the above books and records for inspection whenever
an inspection is undertaken as per the provisions of exchange.
6.4 Functions of Brokers
The following are the important functions generally performed by all the brokers.
1. Client registration
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First of all, a trading broker has to enter into an agreement in the specified format
with his client before accepting any orders on his client's behalf. The said
agreement has to be executed on non-judicial stamp paper, duly signed by both
the parties on all the pages. In addition to the agreement, the broker shall seek
other information about the client in the client registration form. The information
may relate to:
Investor’s financial profile.
Investors risk profile and risk taking ability.
Investor’s social profile.
Investor’s identification details.
Family, income age and employment details.
Details of investments in other assets.
Financial liabilities etc.
The broker has to obtain recent passport size photos in the case of individual
clients and of all partners in the case of partnership firms. In the case of corporate
customers, he has to obtain the photos of dominant promoters. The broker
should not forget to take proof of identification of the client. It is also mandatory
to give a unique code for each client for easy identification. There is no limit on
the maximum number of clients for a broker.
2. Obtaining margin money
It is also mandatory for the broker to collect margins from his clients in all cases
where the margin in respect of the client in settlement, would work out to be
more than Rs. 50,000. The margins so collected must be kept separately in the
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client’s bank account and it must be utilized for making payment or settlement in
respect of that client.
3. Execution of orders
The important function of a broker is to execute his client orders swiftly and
carefully. Hence, he has to obtain clear cut confirmed order instructions from the
clients to that the necessary orders may be placed on the system. To execute a
trade order for a client, he broker must obtain specific instructions as to:
The name of the company whose securities have to be bought or sold.
The precise number of shares required.
The limit or market price conditions etc.
4. Supply of necessary slips
On execution of the trade, the broker the trading member should inform his client
the order number. He should also give copies of the trade confirmation slip,
modification slip, cancellation slip to enable the client to take necessary follow up
action.
5. Issue of contract note
The broker should then issue a contract note to his clients for all trades, whether
for purchase or sale of securities, executed with all relevant details. This contract
note should be issued within 24 hours of the execution of the contract. It should
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be duly signed by the broker or his authorized signatory or client attorney. Every
broker is expected to maintain the duplicate copy of each contract not issued for
five years.
6.5 Kinds of Brokers
1. Jobbers
A jobber is professional independent broker who deals in securities on his own
behalf. His main job is to earn a margin of profit due to price variations of
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securities. He buys securities as a owner, keep them for a very short period and
sell them for profit known as the “Jobber’s turn”.
2. Tarawaniwalas
Tarawaniwalas is an active member of the stock exchanges. These peoples buy
securities from investors on low price and sell them the same investors on high
price.
3. Commission Brokers
A commission broker is nothing but a broker. He buys and sell securities on behalf
of his clients for a commission. He does not purchase or sell in his own name.
4. Sub-Brokers / Remisiers
A Sub-broker is a agent of stock broker. He helps clients to buy or sell securities
through stock brokers because he is not a member of stock exchange.
5. Authorized Clerks
An authorized clerk is one appointed by stock broker to assist him in the business
trading, because a stock broker is can not be present always on the trading floor
of a stock exchange.
7. Badla Transactions
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It refers to postponement of the settlement of a transaction till the next
settlement period. It’s nothing but facility to carry forward the transaction from
one settlement period to another.
It involves payment of some charges known as “BADLA CHARGES” by the
speculator. Badla charges are fixed based on demand and supply conditions in the
market.
To effect Badla transaction, two bargains have to be made.
First is to cancel out the original transaction by squaring it up. This
cancellation is affected at making up price which is decided by exchange.
The second is to reopen the original bargain for next settlement period.
If Buyer has bought XYZ Co’s share in February contract and wants to carry
forward his position say to next month (March). So he has to first sell the same
share in February contract before the expiry date and second he has to create
fresh buying (Long) position in March contract.
If Seller has sold ABC Co’s share in February contract and wants to carry forward
his position say to next month (March). So he has to first buy the same share in
February contract before the expiry date and second he has to create fresh selling
(Short) position in March contract.
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8. Process of Trading
The normal course of online trading in the Indian market context is placed below:
Investor / trader decides to trade
Places order with a broker to buy / sell the required quantity of
respective securities
Best priced order matches based on price-time priority
Order execution is electronically communicated to the broker’s terminal
Trade confirmation slip issued to the investor / trader by the broker
Within 24 hours of trade execution, contract note is issued to the
investor / trader by the broker
Pay-in of funds and securities before T+2 day
Pay-out of funds and securities on T+2 day
In case of short or bad delivery of funds / securities, the exchange orders for an
auction to settle the delivery. If the shares could not be bought in the auction, the
transaction is closed out as per SEBI guidelines
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9. Settlement procedure of Trading Transaction
1. Account Period Settlement
An account period settlement is a settlement where the trades pertaining to a
period stretching over more than one day are settled. For example, trades for the
period Monday to Friday are settled together. The obligations for the account
period are settled on a net basis. Account period settlement has been
discontinued since January 1, 2002, pursuant to SEBI directives.
2. Rolling Settlement
In a Rolling Settlement, trades executed during the day are settled based on the
net obligations for the day. Presently the trades pertaining to the rolling
settlement are settled on a T+2 day basis where T stands for the trade day. Hence,
trades executed on a Monday are typically settled on the following Wednesday
(considering 2 working days from the trade day). The funds and securities pay-in
and pay-out are carried out on T+2 day.
3. The pay-in day and pay- out day
Pay in day is the day when the brokers shall make payment or delivery of
securities to the exchange. Pay out day is the day when the exchange makes
payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling
settlement basis w.e.f. April 01, 2003. The exchanges have to ensure that the pay
out of funds and securities to the clients is done by the broker within 24 hours of
the payout. The Exchanges will have to issue press release immediately after pay
out.
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4. The prescribed pay-in and pay-out days for funds and securities for
Normal Settlement
The pay-in and pay-out days for funds and securities are prescribed as per the
Settlement Cycle. A typical Settlement Cycle of Normal Settlement is given below:
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Activity Day
Trading Rolling Settlement Trading T
Clearing Custodial Confirmation T+1 working days
Delivery Generation T+1 working days
Settlement Securities and Funds pay in T+2 working days
Securities and Funds pay out T+2 working days
Post
Settlement
Valuation Debit T+2 working days
Auction T+3 working days
Bad Delivery Reporting T+4 working days
Auction settlement T+5 working days
Close out T+5 working days
Rectified bad delivery pay-in and
pay-out
T+6 working days
Re-bad delivery reporting and
pickup
T+8 working days
Close out of re-bad delivery T+9 working days
Note: The above is a typical settlement cycle for normal (regular) market
segment. The days prescribed for the above activities may change in case of
factors like holidays, bank closing etc. You may refer to scheduled dates of pay-
in/pay-out notified by the Exchange for each settlement from time-to-time.
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10. The Bombay On-line Trading System (BOLT)
A. Meaning
The Bombay On-line Trading System (BOLT) is CMC's on-line Trading System for
trading in Stocks. The System is operational at Bombay Stock Exchange - the
premier Stock Exchange in the South East Asian region since March 1995. It is one
of the few Stock Trading systems around the globe, which handles hybrid/mixed
mode of trading i.e. Order driven as well as quote driven.
B. Objectives of BOLT System
Reduce and eliminate operational inefficiencies inherent in manual systems.
Increases trading capacity of the stock exchange. Improve market transparency, eliminate unmatched trades and delayed
reporting. Promote fairness and speedy matching. Provide for on-line and off-line monitoring, control and surveillance of the
market. Smooth market operations using technology while retaining the flexibility
of conventional trading practices. Set up various limits, rules and controls centrally. Provide brokers with their trade data on electronic media to interface with
the Broker's Back Office system. Provide a sophisticated, easy to use, graphical user interface (GUI) to all
the users of the system. Provide public information on scrip prices, indices for all users of the
system and allow the stock exchange to do information vending. Provide analytical data for use of the Stock Exchange.
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C. Infrastructure of Online Trading System
Trading on CMC's Trading system BOLT can be carried out for Normal segment as
well as in the Auction, Odd lot segment, Continuous Net Settlement, etc. The
system is capable of handling 2.5 million orders per day. Today, there are around
9000+ BSE trading terminals spread across India.
The brokers / traders operate from their own offices and send their quotes,
orders, negotiated deals, in-house deals, auction orders as the case may be to the
Central Trading Engine (CTE) through the Broker Work Station (BWS). The Best
Bid and the Best Offer (based on price and time priority) in the market form what
is known as the Best Bid and Offer (BBO) for each scrip.
The BBO of all the scrips in the market are available to all the BWS through a
mechanism called broadcast of the market information. The buy and sell orders
placed by the broker / trader will be matched at the best available price in the
market for that scrip, at the time of the order. Subsequent to matching, trade
confirmations are sent to the respective workstations, which can be printed on-
line.
BOLT was developed on Non Stop Tandem platform keeping in view the criticality
of the application.
Online trading in India is the internet based investment activity that involves no
direct involvement of the broker. There are many leading online trading portals
in India along with the online trading platforms of the biggest stock houses like
the National stock exchange and the Bombay stock exchange. The total portion of
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online share trading India has been found to have grown from just 3 per cent of
the total turnover in 2003-04 to 16 per cent in 2006-07.
D. Facilities of the Online Trading System of India
The investor has to register with an online trading portal and get into an
agreement with the firm to trade in different securities following the terms and
conditions listed down on the agreement. The order processing is done in correct
timings as the servers of the online trading portal are connected to the stock
exchanges and designated banks all round the clock. They can also get updates
on the trading and check the current status of their orders either through e-mail
or through the interface. Brokerages also provide research content on their
websites, such that the clients can take their own decisions on stocks before
investing.
E. Product & Service of the Online Trading in India
The major financial products and services of the Online trading in India are like
equities, mutual funds, life insurance, general insurance, loans, share trading,
commodities trading, portfolio management and financial planning.
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11. Depositories and Dematelisation of Securities
Introduction:
Prior to 1996, the stock markets in India were characterized by lack of
transparency, complex trading procedure, outdated settlement system, etc. the
settlement system called for physical transfer of shares certificates to change the
ownership of shares. There were number of risks associated with such physical
transfer of shred, such as bad delivers, delays in transfer and registration, loss
forgery and theft of certificates. The share transfer used to take about 2 months
of more. Therefore, there was great need for introducing modern means of
shares.
To overcome the problems of physical transfer of shares, the Government
introduced the Depository Act, 1996. The depository system (electronic system)
replaced the manual system of shares transfer, and settlement of transaction.
Meaning:
A depository can be defined as ‘an institution which transfer the ownership of
securities in electronic mode on behalf of its members. A depository is a nominee
of the investor, who keeps the shares on their behalf. Therefore, the depository
acts as a custodian of securities.
The two depositors in India are National Securities Depository Limited- NDSL and
Central Depository Service India – CDSL.
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NDSL:
It was set up in 1996. It was promoted by IDBI , UTI , and NSE. At present stock
exchanges like NSE, BSE, Calcutta SE, Delhi SE, OTCEI, Ludhiana SE, and Bangalore
SE have established connectivity with NDSL.
CDSL:
It was set up by BSE and co- sponsored by SBI, Bank of India, Bank of Baroda, and
HDFC Bank. It began its operations in 1999. It performs the same function as that
of NDSL.
Depository Participates
Similar to the brokers who trade on your behalf in and outside the Stock
Exchange; a Depository Participant (DP) is your representative (agent) in the
depository system providing the link between the Company and you through the
Depository. Your Depository Participant will maintain your securities account
balances and intimate to you the status of your holding from time to time.
According to SEBI guidelines, Financial Institutions like banks, custodians,
stockbrokers etc. can become participants in the depository. A DP is one with
whom you need to open an account to deal in electronic form. While the
Depository can be compared to a Bank, DP is like a branch of your bank with
whom you can have an account.
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Benefits of having a Demat Account:
1. Trading in the shares of the Company is now under the compulsory
demat segment. With SEBI making demat mandatory on most of the traded
scrips, electronic transaction will be the only way everyone will trade.
2. No stamp duty for transfer of securities in the electronic form. In case of
transfer of physical shares, stamp duty of 0.5 percent is payable on the
market value of shares being transferred.
3. All risks associated with physical certificates such as delays, loss, in
transit, theft, mutilation, bad deliveries, etc. eliminated. Your shares can be
kept in the “Frozen Mode” by your Depository Participant under your
specific instructions.
4. The concept of an “odd lot” in respect of dematerialized shares stands
abolished, i.e. in the demat mode, market lot becomes one share.
5. Dematerialised securities are most preferred by banks and other
financiers for providing credit facility against securities. Generally, demat
securities attract lower margin and lower rates of interest compared to
physical securities.
6. Even in the electronic mode of trading, the payment mechanism (usually
through a broker) between the buyer and seller continues to be as before.
Also the usual brokerage charges would have to be incurred. However,
after the settlement, pay in and pay out are on the same day for scripless
trading which means you get your securities as well as cash immediately.
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7. Shares bought or sold are transferred in your name on the very next day
of pay out. In case of physical shares, transfer of ownership takes 30 days
or sometimes even more.
8. No courier / postal charges for sending share certificates / transfer
deeds.
9. Facility for freezing / locking of investor accounts, which enables you to make your account non-operational, for instance if you are abroad.
10. Facility to pledge and hypothecate your securities available.
11. As the Depository System becomes popular, brokers will be increasingly
reluctant to deal with physical shares.
12. Investors prefer to buy shares which are already in dematerialised
form.
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11. Conclusion
The stock market can be a great source of confusion for many people. The
average person generally falls into one of two categories. The first believe
investing is a form of gambling; they are certain that if you invest, you will more
than likely end up losing your money. Often these fears are driven by the personal
experiences of family members and friends who suffered similar fates or lived
through the Great Depression. These feelings are not ground in facts and are the
result of personal experience. Someone who believes along this line of thinking
simply does not understand what the stock market is or why it exists.
The second category consists of those who know they should invest for the long-
run, but don’t know where to begin. Many feel like investing is some sort of black-
magic that only a few people hold the key to. More often than not, they leave
their financial decisions up to professionals, and cannot tell you why they own a
particular stock or mutual fund. Their investment style is blind faith or limited to
“this stock is going up. We should buy it.” This group is in far more danger than
the first. They invest like the masses and then wonder why their results are
mediocre (or in some cases, devastating).
In this series of lessons, I set out to prove that the average investor can evaluate
the balance sheet of a company, and following a few relatively simple
calculations, arrive at what they believe is the “real”, or intrinsic value of the
company. This will allow a person to look at a stock and know that it is worth, for
instance, $40 per share. This gives each investor the freedom to know when a
security is undervalued, increasing their long-term returns substantially.
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Before we examine how to value a company, it is important to understand the
nature of businesses and the stock market. This is the cornerstone of learning to
invest well.
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12. Bibliography
Reference Books:1. Principles of Financial Markets Fourth edition by P.C. Tripathi & P.N. Reddy.
Tata McGraw Hill Publishing Company Ltd. New Delhi.
2. Indian Financial System by Gordon & Natrajan Himalaya Publishing House.
3. Secretarial Practice by Michal VazManan Publication House, Mumbai.
Internet:1. www.bse.com2. www.nse.com3. www.rbi.com4. www.moneycontrol.com
Images:1. www.google/images2. www.bse.co/multi/3. www.google/dalal/bse4. www.yahoo.com
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