Intern Ship Project On:
EQUITY: CASH & DERIVATIVE
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It gives me an immense pleasure to present this project report, for the partial
fulfillment of the course. This project has been made possible through the direct
and indirect co-operation of so many people for whom by profound through
appreciation the gratitude remains.
First of all I would like to thanks to Mr. Imran Khan for his valuable suggestions
and constructive criticisms that have acted as a guiding light for me. I also
acknowledge the help given to me by the people of the organization whose
valuable inputs were the driving force behind this project.
I am also grateful to my mentor Dr. Udita Taneja for her constant guidance, co-
operation and valuable time, without her help the project would not have proven
I also like to thank our placement coordinator who has provided me the
opportunity to do my summer training and get engaged with such a supreme
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I, ID MOHAMMAD, M.B.A. Final year (III semester) of University School of
Management Studies, Guru Gobind Sing Indraprastha University, Kashmere Gate,
Delhi hereby declare that the Summer Training Report entitled “ EQUITY: CASH &
DERIVATIVE ” is an original work and the same has not been submitted to any
other institute for the award of any other degree.
Name of the student: ID MOHAMMAD
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CERTIFICATE FROM GUIDE
This is to certify that this Project report titled “EQUITY: CASH & DERIVATIVE” is
prepared and completed successfully by Id Mohammad, Roll no. 11416603909
under my guidance and same has been submitted to University School of
Management Studies, Guru Gobind Singh Indraprastha University.
The project report has been completed to my satisfaction and I wish him all the
best in his future.
(Mr. Imran Khan)
India Infoline Ltd.
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CERTIFICATE FROM MENTOR
This is to certify that this Project report titled “EQUITY: CASH & DERIVATIVE” is
prepared and completed successfully by Id Mohammad, Roll no. 11416603909
under my guidance and same has been submitted to University School of
Management Studies, Guru Gobind Singh Indraprastha University.
The project report has been completed to my satisfaction and I wish him all the
best in his future.
(Dr. Udita Taneja)
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Table Of Contents
INTRODUCTION TO INDIAINFOLINE......................................................................................................7
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IndiaInfoline founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an
independent business research and information provider. It gradually evolved into a one-stop
financial services solutions provider. Its strong management team comprises competent and
INTRODUCTION TO INDIAINFOLINE
It is a pan-India financial services organization across 1,361 business locations and a presence in
428 cities. It’s global footprint extends across geographies with offices in New York, Singapore
and Dubai. It is listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange
It’s offer a wide range of services and products comprising broking (retail and institutional
equities and commodities), wealth management, credit and finance, insurance, asset
management and investment banking.
It is registered with the BSE and the NSE for securities trading, MCX, NCDEX and DGCX for
commodities trading, CDSL and NSDL as depository participants.It is registered as a Category I
merchant banker and are a SEBI registered portfolio manager. It also received the FII license in
IIFL Inc. IIFL Securities Pte Ltd received approval from the Monetary Authority of Singapore to
carry out corporate advisory and dealing in securities operations. Two subsidiaries – India
Infoline Investment Services and Moneyline Credit Limited – are registered with RBI as non-
deposit taking non-banking financial services companies. India infoline Housing Finance Ltd, the
housing finance arm, is registered with the National Housing Bank.
HISTROY OF INDIAINFOLINE
The IndiaInfoline Group was originally incorporated on October 18, 1995 as Probity Research
and Services Private Limited at Mumbai under the Companies Act, 1956 with Registration No.
11 93797. The IndiaInfoline Group commenced its operations as an independent provider of
information, analysis and research covering Indian businesses, financial markets and economy,
to institutional customers. It became a public limited company on April 28, 2000 and the name
of the Company was changed to Probity Research and Services Limited. The name of the
Company was changed to India Infoline.com Limited on May 23, 2000 and later to India Infoline
Limited on March 23, 2001.
In 1999, The IndiaInfoline Group identified the potential of the Internet to cater to a mass retail
segment and transformed our business model from providing information services to
institutional customers to retail customers. Hence we launched our Internet portal,
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www.indiainfoline.com in May 1999 and started providing news and market information,
independent research, interviews with business leaders and other specialized features.
In May 2000, the name of the Company was changed to India Infoline.com Limited to reflect
the transformation of the business. Over a period of time, It has emerged as one of the leading
business and financial information services provider in India.
In the year 2000, The India Infoline Group leveraged it’s position as a provider of financial
information and analysis by diversifying into transactional services, primarily for online trading
in shares and securities and online as well as offline distribution of personal financial products,
like mutual funds and RBI Bonds. These activities were carried on by its wholly owned
The India Infoline Group’s broking services was launched under the brand name of 5paisa.com
through our subsidiary, India Infoline Securities Private Limited and www.5paisa.com, the e-
broking portal, was launched for online trading in July 2000. It combined competitive brokerage
rates and research, supported by Internet technology Besides investment advice from an
experienced team of research analysts, It also offer real time stock quotes, market news and
price charts with multiple tools for technical analysis.
Acquisition of Agri Marketing Services Limited ("Agri")
In March 2000, The IndiaInfoline Group acquired 100% of the equity shares of Agri Marketing
Services Limited, from their owners in exchange for the issuance of 508,482 of our equity
shares. Agri was a direct selling agent of personal financial products including mutual funds,
fixed deposits, corporate bonds and post-office instruments. At the time of its acquisition, Agri
operated 32 branches in South and West India serving more than 30,000 customers with a staff
of, approximately 180 employees. After the acquisition, It has changed the company name to
India Infoline.com Distribution Company Limited.
The India Infoline group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO,
BSE: 532636) and it’s subsidiaries, is one of the leading players in the Indian financial services
space. India Infoline offers the entire gamut of financial services covering investment products
ranging from Equities and derivatives, Commodities, Portfolio Management Services, Mutual
Funds, Life Insurance, Fixed deposits, Loans, Investment Banking, GOI bonds and other small
savings instruments. It owns and manages the website, www.indiinfoline.com, which is one of
India’s leading online destinations for personal finance, stock markets, economy and business.
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A forerunner in the field of equity research, IndiaInfoline’s research is acknowledged by none
other than Forbes as ‘Best of the Web’ and ‘…a must read for investors in Asia’. IndiaInfoline’s
research is available not just over the internet but also on international wire services like
Bloomberg (Code: IILL), Thomson First Call and Internet Securities where it is amongst the most
read Indian brokers.
A network of 753 business locations spread over 346 cities across India, facilitates the smooth
acquisition and servicing of a large customer base. All these offices are connected with the
corporate office in Mumbai with cutting edge networking technology.
The group caters to a customer base of over 500,000 over a variety of mediums viz. online, over
the phone and at our branches. The Group is strengthening its institutional broking and
investment banking services and has built a team of experienced research analysts, sales and
trading professionals. IndiaInfoline refers to IndiaInfoline Ltd and its subsidiaries. The
consolidated figures will give a more meaningful picture of the Company to the investors.
Reference to the company or IndiaInfoline is to the business done by the company and its
subsidiaries, unless otherwise specified.
1995: Incorporated as an equity research and consulting firm with a client base that included
leading FIIs, banks, consulting firms and corporate.
1999: Restructured the business model to embrace the internet; launched
archives.indiainfoline.com , mobilized capital from reputed private equity investors.
2000: Commenced the distribution of personal financial products; launched online equity
trading; entered life insurance distribution as a corporate agent. Acknowledged by Forbes as
‘Best of the Web’ and ‘...must read for investors’.
2004: Acquired commodities broking license; launched Portfolio Management Service.
2005: Listed on the Indian stock markets.
2006: Acquired membership of DGCX; launched investment banking services.
2007: Launched a proprietary trading platform; inducted an institutional equities team; formed
a Singapore subsidiary; raised over USD 300 mn in the group; launched consumer finance
business under the ‘Money line’ brand.
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2008: Launched wealth management services under the ‘IIFL Wealth’ brand; set up India
Infoline Private Equity fund; received the Insurance broking license from IRDA; received the
venture capital license; received in principle approval to sponsor a mutual fund; received ‘Best
broker- India’ award from Finance Asia; ‘Most Improved Brokerage- India’ award from Asia
2009: Received registration for a housing finance company from the National Housing Bank;
received ‘Fastest growing Equity Broking House - Large firms’ in India by Dun & Bradstreet.
“Our vision is to be the most respected company in the financial services space.”
“To become a full-fledged financial services company known for its quality of advice,
personalized services and cutting edge technology”
The IndiaInfoline Group is committed to placing the Investor First, by continuously striving to
increase the efficiency of the operations as well as the systems and processes for use of
corporate resources in such a way so as to maximize the value to the stakeholders. The Group
aims at achieving not only the highest possible standards of legal and regulatory compliances,
but also of effective management.
IndiaInfoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both
the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and
Portfolio Management Services. It offers broking services in the Cash and Derivatives segments
of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a
depository participant, providing a one-stop solution for clients trading in the equities market.
It has recently launched its Investment banking and Institutional Broking business.
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Mr. Nirmal jain (Chairman and Managing Director)
Mr.R.Venkataraman (Executive Director)
Mr.Nilesh Vikamsey (Independent Director)
Mr.satpal Khattar (Non Executive Director)
Mr.Kranti Sinha (Independent Director)
Mr.Arun K. Purva (Independent Director)
⇒ Continuously assimilate, analyse and apply knowledge to power superior financial decisions
⇒ Focus on core competence in financial services
⇒ Derisk through multiple products and diverse revenue streams.
⇒ Enhance customer retention through quality research and service
⇒ Efficiently deploy cutting-edge technology
⇒ Create a wide, multi-modal network to serve customers at one stop.
⇒ Attract exceptionally talented and driven people
⇒ Ensure a conducive environment
⇒ Share ownership liberally
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India Infoline Ltd. and subsidiaries
- Registered with the BSE and the NSE for securities trading (cash and derivatives segment),
with MCX/SX and NSE for currency derivatives segment, with MCX,
NCDEX and DGCX for commodities trading and with CDSL and NSDL as depository participants.It
is also registered as a Category I merchant banker and as a portfolio manager with SEBI.
India Infoline Commodities DMCC
- Broking member of the Dubai Gold and Commodities Exchange (DGCX).
- Regulated by the Financial Industry Regulatory Authority (for Broker Dealer) and by the
Securities & Exchange Commission (for RIA). It is also a SEBI-registered FII.
IIFL Securities Pte Ltd
- Capital Market Services licence issued by the Monetary Authority of Singapore and received
in principle approval for the membership of Singapore Stock Exchange as Trading and Clearing
IIFL Capital Pte Ltd
- Exempt Financial Advisor regulated by the Monetary Authority of Singapore.
IIFL Securities Ceylon (Pvt) Ltd
- Received in-principle membership of the Colombo Stock Exchange.
IIFL is a one-stop financial services shop, most respected for quality of its advice,
personalized service and cutting-edge technology.
IIFL PRODUCTS & SERVICES
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IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository participant and provides
broking services in the cash, derivatives and currency segments, online and offline. IIFL is a dominant
player in the retail as well as institutional segments of the market. It recently became the first Indian
broker to get a membership of the Colombo Stock Exchange and is also the first Indian broker to have
received an in-principle approval for membership of the Singapore Stock Exchange. IIFL’s Trader
Terminal, its proprietary trading platform, is widely acknowledged as one of the best available for retail
investors. Investors opt for IIFL given its unique combination of superior Service, cutting-edge
proprietary Technology, Advice powered by world-acclaimed research and its unparalleled Reach owing
to its over 2500 business locations across over 500 cities in India.
IIFL received the BQ1 broker grading (highest grading) from CRISIL. The assigned grading
reflects an effective external interface, robust systems framework and strong risk management.
The grading also reflects IIFL’s healthy regulatory compliance track record and adequate credit
IIFL’s analyst team won Zee Business’ ‘India’s best market analysts awards – 2009’ for being the
best in the Oil and Gas and Commodities sectors and a finalist in the Banking and IT sectors.
IIFL has rapidly emerged as one of the premier institutional equities houses in India with a team
of over 25 research analysts, a full-fledged sales and trading team coupled with an experienced
investment banking team.
The Institutional equities business conducted a very successful ‘Enterprising India’ global
investors’ conference in Mumbai in March 2010, which was attended by funds with aggregate
AUM over US$5 trillion and CEOs and other executives representing corporates with a
combined market capitalization of over US$500 billion. The ‘Discover Sri Lanka’ global investors’
conference, held in Colombo in July 2010, was attended by more than 50 leading global and
major local investors and 25 Sri Lankan corporates, along with senior Government officials.
IIFL offers commodities trading to its customers vide its membership of the MCX and the NCDEX. Our
domain knowledge and data based on in depth research of complex paradigms of commodity kinetics,
offers our customers a unique insight into behavioral patterns of these markets. Our customers are
ideally positioned to make informed investment decisions with a high probability of success.
CREDIT AND FINANCE
IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage loans, margin
funding, loans against shares) comprise 94% of the loan book. The Company has discontinued its
unsecured products. It has robust credit processes and collections mechanism resulting in overall NPAs
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of less than 1%. The Company has deployed proprietary loan-processing software to enable stringent
credit checks while ensuring fast application processing. Recently the company has also launched Loans
IIFL entered the insurance distribution business in 2000 as ICICI Prudential Life Insurance Co. Ltd’s
corporate agent. Later, it became an Insurance broker in October 2008 in line with its strategy to have
an ‘open architecture’ model. The Company now distributes products of major insurance companies
through its subsidiary India Infoline Insurance Brokers Ltd. Customers can choose from a wide bouquet
of products from several insurance companies including Max New York Life Insurance, MetLife, Reliance
Life Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak Life Insurance and
WEALTH MANAGEMENT SERVICE
IIFL offers private wealth advisory services to high-net-worth individuals (HNI) and corporate
clients under the ‘IIFL Private Wealth’ brand. IIFL Private Wealth is managed by a qualified team
of MBAs from IIMs and premier institutes with relevant industry experience. The team advises
clients across asset classes like sovereign and quasi-sovereign debt, corporate and collateralised
debt, direct equity, ETFs and mutual funds, third party PMS, derivative strategies, real estate
and private equity. It has developed innovative products structured on the fixed income side.
It also has tied up with Interactive Brokers LLC to strengthen its execution platform and provide
investors with a global investment platform.
IIFL’s investment banking division was launched in 2006. The business leverages upon its strength of
research and placement capabilities of the institutional and retail sales teams. Our experienced
investment banking team possesses the skill-set to manage all kinds of investment banking transactions.
Our close interaction with investors as well as corporates helps us understand and offer tailor-made
solutions to fulfill requirements.
The Company possesses strong placement capabilities across institutional, HNI and retail investors. This
makes it possible for the team to place large issues with marquee investors.
In FY10, the team advised and managed more than 10 transactions including four IPOs and four
Qualified Institutions Placements.
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The Indian capital market has been growing tremendously with the reforms in industrial policy,
reforms in public and financial sector, and new economic policies of liberalization, deregulation
and restructuring. The Indian economy has opened up and many developments have been
taking place in the Indian capital market and money market with the help of financial system
and financial institutions or intermediaries which foster savings and channel them to their most
1.1 BACKGROUND OF THE STUDY
In financial markets, stock is the capital raised by a corporation through the issuance and
distribution of shares. A person or organization which holds shares of stocks is called a
shareholder. The aggregate value of a corporation's issued shares is its market capitalization.
When one buys a share of a company he becomes a shareholder in that company. Shares are
also known as Equities. Equities have the potential to increase in value over time. It also
provides the portfolio with the growth necessary to reach the long-term investment goals.
Research studies have proved that the equities have out -performed than most other forms of
investments in the long term. Equities are considered the most challenging and the rewarding,
when compared to other investment options.
Research studies have proved that investments in some shares with a longer tenure of
investment have yielded far superior returns than any other investment. However, this does
not mean all equity investments would guarantee similar high returns. Equities are high-risk
investments. One needs to study them carefully before investing. Since 1990 till date, Indian
stock market has returned about 17% to investors on an average in terms of increase in share
prices or capital appreciation annually, besides that on average stocks have paid 1.5 % dividend
annually. Dividend is a percentage of the face value of a share that a company returns to its
shareholders from its annual profits. Compared to most other forms of investments, investing
in equity shares offers the highest rate of return, if invested over a longer duration.
The first company to issue shares of stock was the Dutch East India Company, in 1602. The
innovation of joint ownership made a great deal of Europe's economic growth possible
following the Middle Ages. The technique of pooling capital to finance the building of ships, for
example, made the Netherlands a maritime superpower. Before adoption of the joint-stock
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corporation, an expensive venture such as the building of a merchant ship could only be
undertaken by governments or by very wealthy individuals or families.
Equity markets, the world over, grew at a great speed in the decade of the nineties. After the
bear markets of the late eighties, the world markets saw one of the largest ever bull markets of
more than ten years. The opening up of Indian economy in the 1990's led to a series of financial
sector reforms, prominent being the capital market reforms. These reforms have led to the
development of the Indian equity markets to t standards of the major global equity markets. All
this started with the abolition of Controller of Capital Issues and subsequent free pricing of
The introduction of dematerialization of shares, leading to faster and cheaper transactions and
introduction of derivative products and compulsory rolling settlement has followed
subsequently. Despite a series of stock market scams and crises beginning from 1992 Harshad
Mehta's scam to the Ketan Parekh's 2001 scam up to the satyam’s 2009 scam, the Indian equity
markets have transformed themselves from a broker dominated market to a mass market. The
introduction of online trading has given a much-needed impetus to the Indian equity markets.
However, over the years, reforms in the equity markets have brought the country on par with
many developed markets on several counts. Today, India boasts of a variety of products,
including stock futures, an instrument launched only by select markets.
The introduction of rolling settlement is the latest step in the direction of overhauling the stock
market. The equity market of the country will most likely be comparable with the world's most
advanced secondary markets with regard to international best practices. The market moved to
compulsory rolling settlement and now all settlements are executed on T+2 basis and market is
gearing up for moving to T+1 settlement in 2004 while the Straight Through Processing (STP) is
in place from December 2002.
The importance of equity market is increasing. Rightly, realizing the advantages of resource
allocation through market, Government of India and Reserve Bank of India have been pushing
reforms in equity markets. Series of steps are being taken to remove hurdles, increase market
efficiency and to make it attractive for the retail investors to take part in the equity market. It
may not be an exaggeration to say that the Indian markets are resourceful to put themselves on
par with the markets of the developed countries. The Indian markets have assimilated in a
relatively lesser time, many a developments that took long time in the developed markets.
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1.2 NEED OR SIGNIFICANCE OF THE STUDY
The Government of India has been trying to improve market efficiency, enhance transparency
and bring the Indian Equity Market up to international standards. Many reform measures have
been initiated in the 90s. The principal ones are the formation of Securities Exchange Board of
India (SEBI), repeal of the Capital Issues (Control) Act, 1947, introduction of screen-based
trading, shortening of trading cycle, demutualization of stock exchanges, establishment of
depositories disappearance of physical share certificates and better risk management systems
in stock exchanges.
As the importance of equity market is increasing day by day it becomes necessary to know the
functionality of stock market and the instruments used in it. Equity market needs a vast area of
knowledge because it consists of many tools and techniques which are uses for valuation of
shares and for doing investment.
This study includes the detailed information about cash equity and derivative market. The
general terminology used equity market is explained in a simplified way in this study. Apart
from these, the way of valuation, the process of listing, delisting of scrips are mentioned as a
separate heading and settlement of the share transaction is stated as well.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to review the Indian equity and derivative market and
evaluation its methodology of work as well. Further it aims:-
(a) To know the condition of equity market in India.
(b) To know the primary and secondary market.
(c) To become familiar with the leading stock exchanges and regulatory bodies in equity
market in India
(d) To know the listing, delisting process of equities or scrips.
(e) To understand the settlement process.
(f) To analyze Indian derivative market
(g) To know the Futures and options contract.
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The present study has been made for partial fulfillment of the requirement for the degree of
Master of Business Administration. However, it has a number of uses for the new investors and
share market knowledge seekers. The users of this study must be aware of the limitations from
which it suffers. Some are listed below:-
1.4 LIMITATIONS OF THE STUDY
(a) Only secondary data used,
(b) Mostly data taken from online resources, so figures may change accordingly.
Research always starts with a question or a problem. Its purpose is to find answers to questions
through the application of the scientific method. It is a systematic and intensive study directed
towards a more complete knowledge of the subject studied. There is basically two type of
research, Qualitative research and Quantitative research and as this research is based on a
topic which can be quantified; this report used quantitative approach of research methodology.
1.5 RESEARCH METHODOLOGY
There are two methods of data collection that can be considered when collecting data for
research purpose. These data collection types include –
1. Primary data 2. Secondary data
Only secondary date is used in this research report. Secondary data is basically the second hand
data. It has been collected from various websites, books and journals (as per our convenience
and requirement) the sources of which are mentioned in the bibliography of the project.
It is an exploratory type research design. It is designed to generate basic knowledge, clarify
relevant issues, uncover variables associated with a problem, uncover information needs, and
to define the alternatives for addressing research objectives.
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SECURITIES MARKET IN INDIA
The securities markets in India have witnessed several policy initiatives, which has refined the
market micro-structure, modernized operations and broadened investment choices for the
investors. The irregularities in the securities transactions in the last quarter of 2000-01,
hastened the introduction and implementation of several reforms. While a Joint Parliamentary
Committee was constituted to go into the irregularities and manipulations in all their
ramifications in all transactions relating to securities, decisions were taken to complete the
process of demutualization and corporatization of stock exchanges to separate ownership,
management and trading rights on stock exchanges and to effect legislative changes for
investor protection, and to enhance the effectiveness of SEBI as the capital market regulator.
Rolling settlement on T+5 basis was introduced in respect of most active 251 securities from
July 2, 2001 and in respect of balance securities from 31s t December 2001. Rolling settlement
on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2
basis from April 1, 2003. All deferral products such as carry forward were banned from July 2,
At the end of March 2010, there were 1,381 companies listed at NSE and 1,236 companies were
available for trading. The Capital Market segment of NSE reported a trading volume of Rs.321
million during 2009 and at the end of November 2010, the NSE Market Capitalization was Rs.
Rs.75,60,607 crores. The derivatives trading on the NSE commenced with the S&P CNX Nifty
Index Futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and
trading in options on individual securities commenced on July 2, 2001. Single stock futures were
launched on November 9, 2001. Thereafter, a wide range of products have been introduced in
the derivatives segment on the NSE. The Index futures and options are available on Indices -
S&P CNX Nifty, CNX Nifty Junior, CNX 100, CNX IT, Bank Nifty and Nifty Midcap 50. Single stock
futures are available on more than 250 stocks. The mini derivative contracts (futures and
options) on S&P CNX Nifty were introduced for trading on January 1, 2008 while the Long term
Options Contracts on S&P CNX Nifty were launched on March 3, 2008.
Due to rapid changes in volatility in the securities market from time to time, there was a need
felt for a measure of market volatility in the form of an index that would help the market
participants. NSE launched the India VIX, a volatility index based on the S&P CNX Nifty Index
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Option prices. Volatility Index is a measure of market’s expectation of volatility over the near
term. Other than the introduction of new products in the Indian stock markets, the Indian Stock
Market Regulator, Securities & Exchange Board of India (SEBI) allowed the direct market access
(DMA) facility to investors in India on April 3, 2008. To begin with, DMA was extended to the
institutional investors. In addition to the DMA facility, SEBI also decided to permit all classes of
investors to short sell and the facility for securities lending and borrowing scheme was
operationalized on April 21, 2008.
The recent years witnessed significant reforms in the capital market. It is well known that
trading platform has become automatic, electronic, anonymous, order-driven, nation-wide and
screen-based. Shouting and gesticulations have yielded place to punching and clicking. Another
development is seen in the period of 2008-10 duration is now an investor need not wait, with
his fingers crossed, for a fortnight or more, for getting crossed cheques or crisp notes for the
sale proceeds of his securities. The trading cycle has been shortened to T+2. This shortening of
the cycle has been done in a phased manner but in a rapid succession
Another material development, which proved to be of immense relief to the investors, was
dematerialization of the scrips. Now, 99% of the scrips in the market are dematerialized. Almost
100% of the trades are in D-mat form.
As a result of the gradual reform process undertaken over the years, the Indian Securities
market has become increasingly broad-based and characterized by an efficient auction process,
an active secondary market, electronic trading and settlement technology that ensures safe
settlement with Straight through Processing (STP).
2.2 SECURITIES MARKET AND FINANCIAL SYSTEM
The securities market has two interdependent and inseparable segments, the new issues
(primary market) and the stock (secondary) market.
The primary market provides the channel for sale of new securities. Primary market provides
opportunity to issuers of securities; government as well as corporate, to raise resources to
meet their requirements of investment and/or discharge some obligation. They may issue the
securities at face value, or at a discount/premium and these securities may take a variety of
forms such as equity, debt etc. They may issue the securities in domestic market and/or
international market. The primary market issuance is done either through public issues or
private placement. A public issue does not limit any entity in investing while in private
placement, the issuance is done to select people. In terms of the Companies Act, 1956, an issue
2.2.1 PRIMARY MARKET
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becomes public if it results in allotment to more than 50 persons. This means an issue resulting
in allotment to less than 50 persons is private placement. There are two major types of issuers
who issue securities. The corporate entities issue mainly debt and equity instruments (shares,
debentures, etc.), while the governments (central and state governments) issue debt securities
(dated securities, treasury bills). The price signals, which subsume all information about the
issuer and his business including associated risk, generated in the secondary market, help the
primary market in allocation of funds.
Secondary market refers to a market where securities are traded after being initially offered to
the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is
done in the secondary market. Secondary market comprises of equity markets and the debt
2.2.2 SECONDARY MARKET
The secondary market enables participants who hold securities to adjust their holdings in
response to changes in their assessment of risk and return. They also sell securities for cash to
meet their liquidity needs. The secondary market has further two components, namely the
over-the-counter (OTC) market and the exchange-traded market. OTC is different from the
market place provided by the Over The Counter Exchange of India Limited. OTC markets are
essentially informal markets where trades are negotiated. Most of the trades in government
securities are in the OTC market. All the spot trades where securities are traded for immediate
delivery and payment take place in the OTC market. The exchanges do not provide facility for
spot trades in a strict sense. Closest to spot market is the cash market where settlement takes
place after some time. Trades taking place over a trading cycle, i.e. a day under rolling
settlement, are settled together after a certain time (currently 2 working days). Trades
executed on the leading exchange (National Stock Exchange of India Limited (NSE) are cleared
and settled by a clearing corporation which provides settlement guarantee. Nearly 100% of the
trades settled by delivery are settled in demat form. NSE also provides a formal trading
platform for trading of a wide range of debt securities including government securities.
A variant of secondary market is the forward market, where securities are traded for future
delivery and payment. Pure forward is out side the formal market. The versions of forward in
formal market are futures and options. In futures market, standardized securities are traded for
future delivery and settlement. These futures can be on a basket of securities like an index or
an individual security. In case of options, securities are traded for conditional future delivery.
There are two types of options–a put option permits the owner to sell a security to the writer of
options at a predetermined price while a call option permits the owner to purchase a security
from the writer of the option at a predetermined price. These options can also be on individual
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stocks or basket of stocks like index. Two exchanges, namely NSE and the Bombay Stock
Exchange, (BSE) provide trading of derivatives of securities.
The past few years in many ways have been remarkable for securities market in India. It has
grown exponentially as measured in terms of amount raised from the market, number of stock
exchanges and other intermediaries, the number of listed stocks, market capitalization, trading
volumes and turnover on stock exchanges, and investor population. Along with this growth, the
Profiles of the investors, issuers and intermediaries have changed significantly. The market has
witnessed fundamental institutional changes resulting in drastic reduction in transaction costs
and significant improvements in efficiency, transparency and safety.
Reforms in the securities market, particularly the establishment and empowerment of SEBI,
market determined allocation of resources, screen based nation-wide trading,
dematerialization and electronic transfer of securities, rolling settlement and ban on deferral
products, sophisticated risk management and derivatives trading, have greatly improved the
regulatory framework and efficiency of trading and settlement. Indian market is now
comparable to many developed markets in terms of a number of qualitative parameters.
The most commonly used indicator of stock market development is the size of the market
measured by stock market capitalization (the value of listed shares on the country’s exchanges)
to GDP ratio. This ratio has improved significantly in India in recent years. At the end of year
2001,the market capitalization ratio stood at 23.1 and this has significantly increased to 113.21
% at 1st
June 2010, which is on the higher side. Similarly, the liquidity of the market can be
gauged by the turnover ratio which equals the total value of shares traded on a country’s stock
exchange divided by stock market capitalization. Turnover Ratio is a widely used measure of
trading activity and measures trading relative to the size of the market.
2.2.3 Stock Market Indicators:
As per the Standard and Poor’s Global Stock Market Fact Book 2009, India ranked 14th in terms
of Market Capitalization and 18th in terms of total traded value in stock exchanges.
Trading in derivatives of securities commenced in June 2000 with the enactment of enabling
legislation in early 2000. Derivatives are formally defined to include: (a) a security derived from
a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for
differences orany other form of security, and (b) a contract which derives its value from the
prices, or index of prices, or underlying securities. Derivatives trading in India are legal and valid
2.2.4 DERIVATIVES MARKET
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only if such contracts are traded on a recognised stock exchange, thus precluding OTC
Derivatives trading commenced in India in June 2000 after SEBI granted the approval to this
effect in May 2000. SEBI permitted the derivative segment of two stock exchanges, i.e. NSE and
BSE, and their clearing house/corporation to commence trading and settlement in approved
To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty Index
and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these
two indices and options on individual securities. The derivatives trading on the NSE commenced
with S&P CNX Nifty Index futures on June 12, 2000. The trading in S&P CNX Nifty Index options
commenced on June 4, 2001 and trading in options on individual securities commenced on July
2, 2001. Single stock futures were launched on November 9, 2001. In June 2003, SEBI-RBI
approved the trading on interest rate derivative instruments.
At NSE, Index futures and options are available on Indices-S&P CNX Nifty, CNX IT Index, Bank
Nifty Index, CNX Nifty Junior, CNX 100, Nifty Midcap 50. Single stock futures and options are
available on more than 200 stocks. India is one of the largest markets in the world for single
stock futures. The Mini derivative Futures & Options contract on S&P CNX Nifty was introduced
for trading on January 1, 2008 while the long term option contracts on S&P CNX Nifty were
introduced for trading on March 3, 2008.
The five main legislations governing the securities market are: (a) the SEBI Act, 1992 which
established SEBI to protect investors and develop and regulate securities market; (b) the
Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to
issue, allotment and transfer of securities, and disclosures to be made in public issues; (c) the
Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in
securities through control over stock exchanges; (d) the Depositories Act, 1996 which provides
for electronic maintenance and transfer of ownership of demat securities; and (e) the
Prevention of Money Laundering Act, 2002 which prevents money laundering and provides for
confiscation of property derived from or involved in money laundering.
2.3 REGULATORY FRAMEWORK
The Government has framed rules under the SCRA, SEBI Act and the Depositories Act. SEBI has
framed regulations under the SEBI Act and the Depositories Act for registration and regulation
of all market intermediaries, and for prevention of unfair trade practices, insider trading, etc.
2.3.1 RULES REGULATIONS AND REGULATORS
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Under these Acts, Government and SEBI issue notifications, guidelines, and circulars which need
to be complied with by market participants. The SROs like stock exchanges have also laid down
their rules and regulations.
The absence of conditions of perfect competition in the securities market makes the role of
regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for
corporate and government and the interest of investors are protected.
The responsibility for regulating the securities market is shared by Department of Economic
Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The
activities of these agencies are coordinated by a High Level Committee on Capital Markets. The
orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal
Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The
powers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers in
respect of the contracts for sale and purchase of securities, gold related securities, money
market securities and securities derived from these securities and ready forward contracts in
debt securities are exercised concurrently by RBI. The SEBI Act and the Depositories Act are
mostly administered by SEBI. The rules under the securities laws are framed by government and
regulations by SEBI. All these are administered by SEBI. The powers under the Companies Act
relating to issue and transfer of securities and non-payment of dividend are administered by
SEBI in case of listed public companies and public companies proposing to get their securities
listed. The SROs ensure compliance with their own rules as well as with the rules relevant for
them under the securities laws.
Fig. 2.1 Indian Securities Market Regulators
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Primary market is the place where issuers create and issue equity, debt or hybrid instruments
for subscription by the public; the secondary market enables the holders of securities to trade
them. Primary market is a market for raising fresh capital in the form of shares. Public limited
companies that are desirous of raising capital funds through the issue of securities approach
this market. The public limited and government companies are the issuers and individuals,
institutions and mutual funds are the investors in this market. The primary market allows for
the formation of capital in the country and the accelerated industrial and economic
Everywhere in the world capital markets have originated as the new issues markets. Once
industrial companies are set up in a big number and with them a considerable volume of
business comes into existence a market for outstanding issues develops. In the absence of
secondary market or the stock exchange, the capital market will be paralyzed. This is on
account of the reason that the business enterprises borrow money from the capital market for
a very long period but the investors or savers whose savings are canalized through the capital
market generally wish to invest only for a short period. Existence of the stock exchange
provides a medium through which these two ends can be reconciled. It enables the investors to
sell their shares for money whenever they wish to do so. Thus, the business enterprises keep
the possession of permanent capital; the shares can keep on changing hands.
In order to sell securities, the company has to fulfill various requirements and decide upon the
appropriate timing and method of issue. It is quite normal to obtain the assistance of
underwriters, merchant banks or special agencies to look after these aspects.
3.2 METHODS OF MARKETING IN PRIMARY MARKET
1. PUBLIC ISSUE: -
A public limited company can raise the amount of capital by selling its shares to the public.
Therefore, it is called public issue of shares or debentures. For this purpose it has to prepare a
'Prospectus'. A prospectus is a document that contains information relating to the company
such as name, address, registered office and names and addresses of company promoters,
managers, Managing Director, directors, company secretary, legal advisors, auditors and
bankers. It also includes the details about project, plant location, technology, collaboration,
products, export obligations etc. The company has to appoint brokers and underwriters to sell
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the minimum number of shares and it has to fix the date of opening and closing of subscription
The new issue of shares or debentures of a company are offered for exclusive subscription of
general public. The prospectus should be approved by SEBI. A minimum of 49 per cent of the
amount of the issue at a time is to be offered to public. The company makes a direct offer to
the general public to subscribe the securities of a stated price. The securities may be issued at
par, at discount or at a premium. An existing company may sell the shares at a premium. There
is no practice of selling shares at a discount in India.
Public issue is a popular method of raising capital. It provides wide distribution of ownership
securities. It also promotes confidence of investors through transparency and non-
discriminatory basis of allotment. It satisfies compliance with the legal requirements. However,
the issue of securities through prospects is time consuming because there are various
formalities to be completed by the company. The cost of raising capital is also very high due to
underwriting, commission, brokerage, publicity, legal, and other administrative costs.
2. PRIVATE PLACEMENT: -
A Company makes the offer of sale to individuals and institutions privately without the issue of
a prospectus. This saves the cost of issue of securities. The securities are placed at higher prices
to individuals and institutions. Institutional investors play a very important role in the private
placement. This has become popular in recent days.
This method is less expensive and time saving. The company has to complete a very few
formalities. It is suitable for small companies as well as new companies. This method can be
used when the stock market is bull. However, the private placement helps to concentrate
securities in the few hands. They can create artificial scarcity and increase the prices of shares
temporarily and then sell the shares in the stock market and mislead the common and small
investors. This method also deprives the common investors of an opportunity to subscribe to
the issue of shares.
3. OFFER FOR SALE: -
A Company sells the securities through the intermediaries such as issue houses, and
stockbrokers. This is known as an offer for sale method. Initially, the company makes an offer
for sale of its securities to the intermediaries stating the price and other terms and conditions.
The intermediaries can make negotiations with the company and finally accept the offer and
buy the shares from the company. Then these securities or shares are re-sold to the general
investors in the stock market normally at a higher price in order to get profit. The
intermediaries have to bear the expenses of this issue. The object of this issue is to save the
time, cost and get rid of complicated procedure involved in the marketing of securities. The
issues can also be underwritten in order to ensure full subscription of the issue. The general
public get the shares at a higher price the middlemen are more benefited in this process.
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4. BOUGHT OUT DEALS: -
A Company makes an outright sale of equity shares to a single sponsor or the lead sponsor and
such deals are known as bought out deals. There are three parties involved in the bought out
deals. The promoters of the company, sponsors and co-sponsors, sponsors are merchant
bankers and co-sponsors are the investors. There is an agreement in which an outright sale of a
chunk of equity shares is made to a single sponsor or the lead sponsor. The sale price is
finalized through negotiations between the issuing company and the purchasers. It is influenced
by various factors such as project evaluation, reputation of the promoters, current market
sentiments etc. Bought out deals are in the nature of fund-based activity where the funds of
the merchant bankers are locked in for at least for a minimum period. These shares are sold at
over the Counter Exchange of India or at a recognized stock exchange. Listing takes place when
the company gets profits and performs well. The investor-sponsors make profits because the
shares are listed at higher price.
5. INITIAL PUBLIC OFFER: -
When a company makes public issue of shares for the first time, it is called Initial Public Offer.
The securities are sold through the issue of prospectus to successful applicants on the basis of
their demand. The company has to appoint underwriters in order to guarantee the minimum
subscription. An underwriter is generally an investment banking company. The underwriter
agrees to pay the company a certain price and buy a minimum number of shares, if they are not
subscribed by the public. The underwriter charges some commission for this work. He can sell
these shares in the market afterwards and make profit. There may be two or more
underwriters in case of large issue.
The company has to issue a prospectus giving full information about the company and the
issue. It has to issue share application forms through the brokers and underwriters. The brokers
collect orders from their clients and place orders with the company. The company then makes
the allotment of shares with the help of stock exchange. The share certificate are delivered to
the investors or credited to their demat accounts through the depository. This method saves
time and avoids complicated procedure of issue of shares.
6. RIGHT ISSUE: -
When an existing company issues shares to its existing shareholders in proportion to the
number of shares held by them, it is known as Rights Issue. Rights issue is obligatory for a
company where increase in subscribed capital is necessary after two years of its formation or
after one year of its first issue of shares, whichever is earlier.
SEBI has issued guidelines for issue of right shares. Accordingly, only a listed company can make
right issue. Rights issue can be made only in respect of fully paid up shares. No reservation is
allowed for rights issue of fully or partly convertible debentures. The company has to make
announcement of rights issue and once the announcement is made it cannot be withdrawn.
The company has to make the appointment Registrar but underwriting is optional. It has also to
appoint category I Merchant Bankers holding a certificate of registration issued by SEBI. Letter
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of offer should contain disclosures as per SEBI requirements. The rights issue should be open
for minimum period of 30 days, and maximum up to 60 days. The company has to make an
agreement with the depository for materialization of securities to be issued in demat form. A
minimum subscription of 90 per cent of the issue should be received. A no complaints
certificate is to be filed by the Lead Merchant Banker with the SEBI after 21 days from the date
of issue of offer document.
7. BONUS ISSUE: -
Bonus shares are the shares allotted by capitalization of the reserves or surplus of a company.
Issue of bonus shares results in conversion of the company's profits or reserves into share
capital. Therefore, it is capitalization of company's reserves. Bonus shares are issued to the
equity shareholders in proportion to their holdings of the equity share capital of the company.
Issue of bonus shares does not affect the total capital structure of the company. It is simply a
capitalization of that portion of shareholders equity which is represented by reserves and
surplus. The issues of bonus shares are issued subject to certain rules and regulations. Issue of
bonus shares reduces the market price of the company's shares and keeps it within the reach of
ordinary investors. The company can retain earnings and satisfy the desire of the shareholders
to receive dividend. Issue of bonus shares is generally an indication of higher future profits.
Receipt of bonus shares as compared to cash dividend generally results in tax advantage to the
8. BOOK-BUILDING: -
Companies generally raise capital through public issue. In these cases companies decide the size
of the issue and also the price at which the shares are to be offered to the investors. However
in this system the issuer is not able to ascertain the price that the market may be willing to pay
for the shares, before launching the issue. This is where book building can come to their aid.
This method is also known as the price discovery method. This is a mechanism whereby the
price is determined on the basis of actual demand as evident form the offers given by the
various institutional investors and the underwriters.
In the actual public offer process, investors are not involved in determining the offer price,
whereas in book building pricing is determined on the basis of investor feedback which assures
investor demand. Since the issue price after the issue marketing there is flexibility in the issue
size and the price of the shares.
The option of book building is available to all body corporate, which are otherwise eligible to
make issue of capital to the public. The initial minimum size of issue through book-building
process was fixed at Rs. 100 crores/-. However, issue of any size was allowed since 1996. Book-
Building facility is available as an alternative to firm allotment. A Company can opt for book-
building process for the sale of securities to the extent of the percentage of the issue. that can
be reserved for firm allotment.
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Book-Building method helps in evaluating the intrinsic worth of an instrument and the
company's credibility in the eyes of the investor. The company also gets firm commitments on
the basis of which it can decide whether to go or not to go for a particular issue of securities.
Book-Building process also provides reliable allotment procedure and quick listing of shares on
the stock exchanges. There is no price manipulation because the price is determined on the
basis of bids received' from the investors. The following stages are involved in the book-building
a) Appointment of book-runners.
b) Drafting of prospectus and getting approval from SEBI.
c) Circulating draft prospectus.
d) Maintaining offer details.
e) Intimation of aggregate orders to the book-runner.
f) Bid analysis.
g) Mandatory underwriting.
h) Filing copy of prospectus with registrar of companies.
i) Opening bank accounts for collection of application money.
j) Collection of applications.
k) Allotment of shares.
l) Payment schedule and listing of shares.
1. MERCHANT BANKERS: -
3.3 INTERMEDIARIES IN PRIMARY MARKET
Merchant bankers carry out the work of underwriting and portfolio management, issue
management etc. They are required to get separate registration with SEBI as portfolio
managers. Underwriting can be done without any additional registration. Only body corporate
with a net worth of Rs.5 crores are allowed to work as category I merchant bankers. They have
to carry out the work relating to new issue such as determination of security mix to be issued,
drafting of prospectus, application forms, allotment letters, appointment of registrars for
handling share applications and transfer, making arrangement for underwriting placement of
shares, appointment of brokers and bankers to issue, making publicity of the issue. They are
also known as lead managers to an issue.
Category II merchant bankers can act as consultants, advisers, portfolio managers and co-
managers. Category III merchant bankers can act as underwriters, advisors and consultants and
category IV merchant bankers can act only as advisers or consultants to a public issue.
Merchant bankers have to fulfill the prescribed minimum capital adequacy norms in terms of
net worth and they should have adequate and necessary infrastructure. They should also
employ experts having professional qualifications.
2. UNDERWRITERS: -
The issuing company has to appoint underwriters in consultation with the merchant bankers or
lead manager. The underwriters play an important role in the development of the primary
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market. The underwriters are the institutions or agencies, which provide a commitment to take
up the issue of securities in case the company fails to get full subscription from the public. They
get commission for their services. The underwriting services are provided by the brokers,
investment companies’ commercial banks and term lending institutions.
3. BANKERS TO THE ISSUE: -
The bankers play an important role in the working of the primary market. They collect
applications for shares and debentures along with application money from investors in respect
of issue of securities. They also refund the application money to the applicants to whom
securities could not be allotted on behalf of the issuing company. A company is not authorized
to collect the application money. The Companies Act, 1956, provides that the money on
account of issue of shares and debentures should be collected through the banks. Therefore, an
issuing company has to appoint bankers to collect money on behalf of the company.
4. REGISTRARS AND SHARES TRANSFER AGENTS: -
Registrar is an intermediary which carries out functions such as keeping a proper record of
applications and money received from investors, assisting the companies in determining the
basis of allotment of securities as per stock exchange guidelines and in consultation with stock
exchanges assist in the finalization of allotment of securities and processing and dispatching of
allotment letters, refund orders, share certificates and other documents related to the capital
issues. Share Transfer Agents are also intermediaries who carry out functions of maintaining
records of holders of securities of the company for and on behalf of the company and handling
all matters related to transfer and redemption of securities of the company. They also function
as Depository Participants.
Registrar and share transfer agents are of two categories. Category I carry out the activities of
both registrars to an issue and of share transfer agents. Category II carries out the activity
fielder of a registrar to an issue or as a share transfer agent.
5. BROKERS TO AN ISSUE: -
Brokers are the middlemen who provide a vital connecting link between the prospective
investors and the issuing company. They assist in the subscription of issue by the public.
However, appointment of brokers is not mandatory. Brokers get their commission from the
issuing company according to the provisions of the Companies Act and rules and regulations.
There is an agreement between the brokers and the issuing company. The maximum brokerage
rate is 1.5 per cent of the capital raised in case of public issue and 0.5 per cent in case of private
placement. The brokerage covers the cost of mailing, canvassing and all other expenses relating
to the subscription of the issue.
The brokers should have an expert knowledge, professional competence and integrity in order
to carry out the overall functions of an issue. They have to obtain consent from the stock
exchange to act as a broker to the issuing company. The names and addresses of the brokers to
the issue are disclosed in the prospects by the company help the investors to make a choice of
the company for making their investments.
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Secondary market is the place for sale and purchase of existing securities. It enables an investor
to adjust his holdings of securities in response to changes in his assessment about risk and
return. It also enables him to sell securities for cash to meet his liquidity needs. It essentially
comprises of the stock exchanges which provide platform for trading of securities and a host of
intermediaries who assist in trading of securities and clearing and settlement of trades. The
securities are traded, cleared and settled as per prescribed regulatory framework under the
supervision of the Exchanges and SEBI.
4.2 MARKET DESIGN
The stock exchanges are the exclusive centers for trading of securities. Listing of companies on
a Stock Exchange is mandatory to provide an opportunity to investors to invest in the securities
of local companies. The trading volumes on exchanges have been witnessing phenomenal
growth for last few years. Since the advent of screen based trading system in 1994-95, it has
been growing by leaps and bounds and reported a total turnover of Rs. Rs.55,18,470 crore
during 2009-10. The growth of turnover has, however, not been uniform across exchanges as
may be seen from Table 4.1. The increase in turnover took place mostly at big exchanges(NSE
and BSE) and it was partly at the cost of small exchanges that failed to keep pace with the
changes. The business moved away from small exchanges to big exchanges, which adopted
technologically superior trading and settlement systems. The huge liquidity and order depth of
big exchanges further diverted liquidity of other stock exchanges. The 17 small exchanges put
together reported less than 0.03% of total turnover during 2009-10, while 2 big exchanges
accounted for over 99.98 % of turnover.
4.2.1 STOCK EXCHANGES
BOMBAY STOCK EXCHANGE (BSE):
Bombay Stock Exchange Limited (the Exchange) is the oldest stock exchange in Asia with a rich heritage.
Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875.
It is the first stock exchange in the country to obtain permanent recognition in 1956 from the
Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and
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pre-eminent role in the development of the Indian capital market is widely recognized and its index,
SENSEX, is tracked worldwide.
• India's oldest and first stock exchange: Mumbai (Bombay) Stock Exchange. Established
in 1875. Total 4900 stocks are listed.
• Total number of stock exchanges in India: 22 They are in: Ahmedabad, Bangalore,
Calcutta, Chennai, Delhi etc.
• There is also a National Stock Exchange (NSE) which is located in Mumbai.
• There is also an Over the Counter Exchange of India (OTCEI) which allows listing of
small and medium sized companies.
• The regulatory agency which oversees the functioning of stock markets is the
Securities and Exchange Board of India (SEBI), which is also located in Bombay.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies and
the world's 5th in transaction numbers. The market capitalization as on March, 2010 stood at
USD 1.79 trillion.
NATIONAL STOCK EXCHANGE (NSE):
The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and
towns across the country. NSE was set up by leading institutions to provide a modern, fully
automated screen-based trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity.
NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualization
of stock exchange governance, screen based trading, compression of settlement cycles,
dematerialization and electronic transfer of securities, securities lending and borrowing,
professionalization of trading members, fine-tuned risk management systems.
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Table 4.1: Turnover of Regognized Stock Exchange in India
2008-09 2009-10 Percentage share
Total 38,52,579 55,18,470 100.00
CORPORATISATION & DEMUTUALISATION OF STOCK EXCHANGES:
Source: SEBI Annual Report 2009-10
‘Corporatization’ means the succession of a recognized stock exchange, being a body of
individuals or a society registered under the Societies Registration Act 1860 (21 of 1860) by
another stock exchange, being a company incorporated for the purpose of assisting, regulating
or controlling the business of buying, selling or dealing in securities carried on by such
individuals or society.
‘Demutualization’ means the segregation of ownership and management from the trading
rights of the members of a recognized stock exchange in accordance with the scheme approved
by the Securities and Exchange Board of India.
Demutualization is the process through which a member-owned company becomes
shareholder-owned company. Worldwide, stock exchanges have offered striking example of the
trend towards demutualization, as the London Stock Exchange (LSE), New York Stock Exchange
(NYSE), Toronto Stock Exchange (TSE) and most other exchanges across the globe have moved
towards demutualization and India is no exception to it.
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In January 2002, SEBI directed all the recognized stock exchanges to suitably amend their Rules,
Articles etc. within a period of two months from the date of the order to provide that no broker
member of the stock exchanges shall be an office bearer of an exchange, i.e. hold the position
of President, Vice President, Treasurer etc. This was done to give effect to the decision taken by
SEBI and the policy decision of Government in regard to demutualization / corporatization of
exchanges by which ownership, management and trading membership would be segregated
from each other.
STOCK EXCHANGES SUBSIDIARY
SEBI required with effect from February 28, 2003 that the small stock exchanges which are
permitted to promote/float a subsidiary/company to carry out the following changes in
management structure of their subsidiaries and to ensure the compliance:
1) The subsidiary company should appoint a CEO who should not hold any position
concurrently in the stock exchange (parent exchange). The appointment, the terms and
conditions of service, the renewal of appointment and the termination of service of CEO
should be subject to prior approval of SEBI.
2) The governing board of the subsidiary company should have the following composition
viz., (a) the CEO of the subsidiary company should be a director on the Board of
subsidiary and the CEO should not be a sub-broker of the subsidiary company or a
broker of the parent exchange (b) at least 50% of directors representing on the
Governing Board of subsidiary company should not be sub-brokers of the subsidiary
company or brokers of the promoter/holding exchange and these directors should be
called the Public Representatives (c) the public representatives should be nominated by
the parent exchange (subject to prior approval of SEBI) (d) public representatives should
hold office for a period of one year from the date of assumption of the office or till the
Annual General Meeting of subsidiary company whichever is earlier (e) there should be
a gap of at least one year after a consecutive period of three years before re-nomination
of any person for the post of non- member director (f) the parent exchange should
appoint a maximum of two directors who are officers of the parent exchange.
3) The subsidiary company should have its own staff none of whom should be
concurrently working for or holding any position of office in the parent exchange.
4) The parent exchange should be responsible for all risk management of the subsidiary
company and shall set up appropriate mechanism for the supervision of the trading
activity of subsidiary company.
4.2.2 MEMBERSHIP IN NSE
The trading platform of the Exchange is accessible to investors only through the trading
members who are subject to its regulatory discipline. Any person can become a member by
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complying with the prescribed eligibility criteria and exit by surrendering trading membership
without any hidden/overt cost. There are no entry/exit barriers to trading membership.
The members are admitted to the different segments of the Exchange subject to the provisions
of the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India
Act, 1992, the Rules, circulars, notifications, guidelines, etc., issued there under and the Bye
laws, Rules and Regulations of the Exchange.
The standards for admission of members laid down by the Exchange stress on factors such as,
corporate structure, capital adequacy, track record, education, experience, etc. and reflect a
conscious effort on the part of NSE to ensure quality broking services so as to build and sustain
confidence among investors in the Exchange’s operations.
BENEFITS TO THE TRADING MEMBERSHIP OF NSE INCLUDE:
1) access to a nation-wide trading facility for equities, derivatives, debt and hybrid
2) ability to provide a fair, efficient and transparent securities market to the investors,
3) use of state-of-the-art electronic trading systems and technology,
4) dealing with an organization which follows strict standards for trading & settlement at
par with those available at the top international bourses,
5) a demutualised Exchange which is managed by independent and experienced
6) dealing with an organization which is constantly striving to move towards a global
marketplace in the securities industry.
Membership of NSE is open to all persons desirous of becoming trading members, subject to
meeting requirements/criteria as laid down by SEBI and the Exchange. The different segments
currently available on the Exchange for trading are:
A. Capital Market
B. Wholesale Debt Market
C. Derivatives (Futures and Options) Market
Persons or Institutions desirous of securing admission as Trading Members (Stock Brokers) on
the Exchange may apply for any one of the following segment groups:
1. Wholesale Debt Market (WDM) segment
2. Capital Market segment
3. Capital Market (CM) and Wholesale Debt Market (WDM) segments
4. Capital Market (CM) and Futures & Options (F&O) segments
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5. Capital Market (CM), Wholesale Debt Market (WDM) and Futures & Options (F&O)
6. Clearing Membership of National Securities Clearing Corporation Ltd. (NSCCL) as a
Professional Clearing Member (PCM)
ELIGIBILITY CRITERIA FOR MEMBERSHIP:
The eligibility criteria and deposits/fees payable for trading membership are summarized in
Table 5.2. An applicant for membership must possess the minimum stipulated net worth. The
net worth for the purpose should be calculated as stipulated by the Exchange/SEBI. In case the
company is a member of any other Stock Exchange(s), it should satisfy the combined minimum
net worth requirements of all these Stock Exchanges including NSEIL. The minimum paid up
capital of a corporate applicant for trading membership should be Rs. 30 lakh.
Table 4.2: Eligibility Criteria for Membership
WDM Segment CM and F&O Segments CM and WDM
CM, WDM and
Paid-up capital Rs. 30 lakh Rs. 30 lakh Rs. 30 lakh Rs. 30 lakh
Net Worth Rs. 200 lakh Rs 100 lakh* Rs . 200 lakh Rs . 200 lakh*
Rs. 150 lakh Rs. 125 lakh** Rs. 250 lakh Rs. 275 lakh**
- Rs. 25 lakh** Rs. 25 lakh Rs. 25 lakh**
Annual Subscription Rs. 1 lakh Rs. 1 lakh Rs. 2 lakh Rs. 2 lakh
Education At least two
should be graduates.
Dealers should also
have passed SEBI
test for derivatives and
NCFM Capital Market
(Basic or Dealers)
At least two
directors should be
also have passed
Market (Basic or
At least two
directors should be
Dealers should also
have passed SEBI
certification test for
Market (Basic or
Experience ----------------Two year's experience in securities market-----------
Track Record The Applicant/Partners/Directors should not be defaulters on any stock exchange. They
must not be debarred by SEBI for being associated with capital market as intermediaries.
They must be engaged solely in the business of securities and must not be engaged in any
* No additional net worth is required for self clearing members in the F&O segment. However,
a net worth of Rs. 300 lakh is required for members clearing for self as well as for other TMs.
Source: NSE website
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**Additional Rs. 25 lakh is required for clearing membership on the F&O segment. In addition, a
member clearing for others is required to bring in IFSD of Rs. 2 lakh and CSD of Rs. 8 lakh per
trading member; he undertakes to clear in the F&O segment.
Listing means admission of securities of an issuer to trading privileges on a stock exchange
through a formal agreement. The prime objective of admission to dealings on the Exchange is
to provide liquidity and marketability to securities, as also to provide a mechanism for effective
management of trading.
4.2.3 LISTING OF SECURITIES
As per SEBI directive, an unlisted company may make an initial public offering (IPO) of equity
shares or any other security which may be converted into or exchanged with equity shares at a
later date, only if it meets all the following conditions:
a) The company should have net tangible assets of at least Rs. 3 crore in each of the
preceding 3 full years (of 12 months each), of which not more than 50% is held in
b) The company should have a track record of distributable profits in terms of section 205
of the Companies Act, 1956, for at least three (3) out of immediately preceding five (5)
c) The company should have a net worth of at least Rs. 1 crore in each of the preceding 3
full years (of 12 months each);
d) In case the company has changed its name within the last one year, atleast 50% of the
revenue for the preceding 1 full year is earned by the company from the activity
suggested by the new name; and
e) The aggregate of the proposed issue and all previous issues made in the same financial
year in terms of size (i.e. offer through offer document + firm allotment + promoters’
contribution through the offer document), does not exceed five (5) times its pre-issue
net worth as per the audited balance sheet of the last financial year.
At the time of listing securities of a company on a stock exchange, the company is required to
enter into a listing agreement with the exchange. The listing agreement specifies the terms and
conditions of listing and the disclosures that shall be made by a company on a continuous basis
to the exchange for the dissemination of information to the market.
DISCLOSURE OF AUDIT QUALIFICATIONS:
SEBI has advised the Stock exchanges to modify the listing agreement to incorporate disclosure
of audit qualifications. The same would include:
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• disclosures of amounts at the year end and the maximum amount of loans/ advances/
investments outstanding during the year from both parent to subsidiary and vice versa,
• un-audited quarterly results of all listed companies should be subjected to Limited
Review from the quarters ending on or after June 30, 2003,
• Publication of consolidated financial results along with stand-alone financial results
should be applicable on annual basis only. However, companies may have option to
publish consolidated financial results along with stand alone financial results on a
quarterly/half yearly basis,
• In addition to the above, the stock exchanges should also be required to inform SEBI in
cases where companies have failed to remove audit qualifications.
SEBI (Delisting of Securities) Guidelines 2003 are applicable to delisting of securities of
companies and specifically apply to:
4.2.4 DELISTING OF SECURITIES
a) Voluntary delisting being sought by the promoters of a company
b) Any acquisition of shares of the company (either by a promoter or by any other person)
or scheme or arrangement, by whatever name referred to, consequent to which the
public shareholding falls below the minimum limit specified in the listing conditions or
listing agreement that may result in delisting of securities
c) Promoters of the companies who voluntarily seek to de-list their securities from all or
some of the stock exchanges
d) Cases where a person in control of the management is seeking to consolidate his
holdings in a company, in a manner which would result in the public shareholding in the
company falling below the limit specified in the listing conditions or in the listing
agreement that may have the effect of company being de-listed
e) Companies which may be compulsorily de-listed by the stock exchanges: provided that
company shall not be permitted to use the buy-back provision to delist its securities.
• Any promoter or acquirer desirous of delisting securities of the company under the
provisions of these guidelines should obtain the prior approval of shareholders of the
company by a special resolution passed at its general meeting, make a public
announcement in the manner provided in these guidelines, make an application to the
delisting exchange in the form specified by the exchange, and comply with such other
additional conditions as may be specified by the concerned stock exchanges from where
securities are to be de-listed.
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• Any promoter of a company which desires to de-list from the stock exchange should
determine an exit price for delisting of securities in accordance with the book building
process as stated in the guidelines.
• The stock exchanges shall provide the infrastructure facility for display of the price at
the terminal of the trading members to enable the investors to access the price on the
screen to bring transparency to the delisting process. The stock exchange shall also
monitor the possibility of price manipulation and keep under special watch the
securities for which announcement for delisting has been made.
COMPULSORY DE-LISTING OF COMPANIES
• The stock exchanges may de-list companies which have been suspended for a minimum
period of six months for non-compliance with the listing agreement.
• The stock exchanges have to give adequate and wide public notice through newspapers
and also give a show cause notice to a company. The exchange shall provide a time
period of 15 days within which representation may be made to the exchange by any
person who may be aggrieved by the proposed delisting.
• Where the securities of the company are de-listed by an exchange, the promoter of the
company should be liable to compensate the security holders of the company by paying
them the fair value of the securities held by them and acquiring their securities, subject
to their option to remain security-holders with the company.
REINSTATEMENT OF DE-LISTED SECURITIES
Reinstatement of de-listed securities should be permitted by the stock exchanges with a cooling
period of 2 years. It should be based on the respective norms/criteria for listing at the time of
making the application for listing and the application should be initially scrutinized by the CLA.
NSE plays an important role in helping Indian companies access equity capital, by providing a
liquid and well-regulated market. NSE has 1,800 (as on 31s t March 2010) companies listed
representing the length, breadth and diversity of the Indian economy which includes from hi-
tech to heavy industry, software, refinery, public sector units, infrastructure, and financial
services. Listing on NSE raises a company’s profile among investors in India and abroad. Trade
data is distributed worldwide through various news vending agencies. More importantly, each
and every NSE listed company is required to satisfy stringent financial, public distribution and
management requirements. High listing standards foster investor confidence and also bring
credibility into the markets.
4.2.5 LISTING OF SECURITIES ON NSE
NSE lists securities in its Capital Market (Equities) segment and its Wholesale Debt Market
segment. NSE trading terminals are now situated in 245 cities across the length and breadth of
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India. Securities listed on the Exchange are required to fulfill the eligibility criteria for listing.
Various types of securities of a company are traded under a unique symbol and different series.
BENEFITS OF LISTING ON NSE
Listing on NSE provides qualifying companies with the broadest access to investors, the greatest
market depth and liquidity, cost-effective access to capital, the highest visibility, the fairest
pricing, and investor benefits.
a) A premier marketplace: The sheer volume of trading activity ensures that the impact cost is
lower on the Exchange which in turn reduces the cost of trading to the investor. NSE’s
automated trading system ensures consistency and transparency in the trade matching
which enhances investors confidence and visibility of our market.
b) Visibility: The trading system provides unparallel level of trade and post-trade information.
The best 5 buy and sell orders are displayed on the trading system and the total number of
securities available for buying and selling is also displayed. This helps the investor to know
the depth of the market. Further, corporate announcements, results, corporate actions etc
are also available on the trading system.
c) Largest exchange: NSE is the largest exchange in the county in terms of trading volumes.
The Equity segment of the NSE witnessed an average daily turnover of Rs. 13,274.58 crore
in March 31- 2010. During the year 2009-2010, NSE reported a turnover of Rs. 41,38,023
crore in the equities segment accounting for nearly 75 % of the total Indian securities
d) Unprecedented reach: NSE provides a trading platform that extends across the length and
breadth of the country. Investors from around 245 cities as on 31s t March 2008 can avail of
trading facilities on the NSE Trading Network. The Exchange uses the latest communication
technology to give instant access from every location.
e) Modern infrastructure: NSE introduced for the first time in India, fully automated screen
based trading. The Exchange uses a sophisticated telecommunication network with trading
terminals connected through 2,956 VSATs (Very Small Aperture Terminals) at the end of
f) Transaction speed: The speed at which the Exchange processes orders, results in liquidity
and best available prices. The Exchange's trading system on an average processes 100,062
orders per minute. The highest number of trades in a day of 68,12,991 was recorded on
January 3, 2008 in the equity segment while 14,20,967 trades were recorded in the F&O
Segment on October 18, 2007.
g) Short settlement cycles: The Exchange has successfully completed around 2032 settlements
as on 31st March 2008 without any delays.
h) Broadcast facility for corporate announcements: The NSE network is used to disseminate
information and company announcements across the country. Important information
regarding the company is announced to the market through the Broadcast Mode on the
NEAT System as well as disseminated through the NSE website. Corporate developments
such as financial results, book closure, announcements of bonus, rights, takeover, mergers
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etc. are disseminated across the country thus minimizing scope for price manipulation or
i) Trade statistics for listed companies: Listed companies are provided with monthly trade
statistics for all the securities of the company listed on the Exchange.
j) Investor service centers: Six investor-service centers opened by NSE across the country
cater to the needs of investors.
The Exchange has laid down criteria for listing of new issues by companies through IPOs,
companies listed on other exchanges in conformity with the Securities Contracts (Regulation)
Rules, 1957 and directions of the Central Government and the Securities and Exchange Board of
India (SEBI). The criteria include minimum paid-up capital and market capitalisation,
company/promoter's track record, etc. The listing criteria for companies in the CM Segment are
presented in Table 3.4. The issuers of securities are required to adhere to provisions of the
Securities Contracts (Regulation) Act, 1956, the Companies Act, 1956, the Securities and
Exchange Board of India Act, 1992, and the rules, circulars, notifications, guidelines, etc.
prescribed there under.
Table 4.3: Listing Criteria for Companies on the CM Segment of NSE
Initial Public Offerings
Companies listed on other
PUEC = Rs. 10 cr. and MC = Rs. 25 cr. PUEC = Rs. 10 cr. and MC = Rs. 25 cr. OR
PUEC = Rs. 25 cr. OR
MC = Rs. 50 cr. OR
The company shall have a net worth of not less
than Rs.50 crores in each of the preceding
At least 3 years track record of either:
a) the applicant seeking listing OR
b) the promoters/promoting company
incorporated in or outside India OR
c)Partnership firm and subsequently
converted into Company not in
existence as a Company for three years
and approaches the Exchange for listing.
The Company subsequently formed
would be considered for listing only on
fulfillment of conditions stipulated by
SEBI in this regard.
Atleast three years track record of either
a) the applicant seeking listing; OR
b) the promoters/promoting company,
incorporated in or outside India.
Dividend Record /
Net worth /
-- Dividend paid in at least 2 out of the last 3
financial years immediately preceding the year
in which the application has been made OR The
net worth of the applicants at least Rs.50 crores
OR The applicant has distributable profits in at
least two out of the last three financial years.
Listing -- Listed on any other recognized stock exchange
for at least last three years OR listed on the
exchange having nationwide trading terminals
for at least one year.
Other Requirements (a) No disciplinary action by other stock-
exchanges/regulatory authority in past 3
a) No disciplinary action by other stock
exchanges/regulatory authority in past 3 yrs.
(b) Satisfactory redressal mechanism for
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(b)Satisfactory redressal mechanism for
(c ) distribution of shareholding and
(d) details of litigation record in past 3
(e) Track record of Directors
of the Company
(c ) distribution of shareholding and
(d) details of litigation record in past 3 years.
(e) Track record of Directors of the Company
(f) Change in control of a Company/Utilisation
of funds raised from public.
Source: NSE Website
1. (a) In case of IPOs, Paid up Equity Capital means post issue paid up equity capital.
(b) In case of Existing companies listed on other exchanges, the existing paid up equity capital
as well as the paid up equity capital after the proposed issue for which listing is sought shall be
taken into account.
2. (a) In case of IPOs, market capitalization is the product of the issue price and the post-issue
number of equity shares.
(b) In case of case of Existing companies listed on other stock exchanges the market
capitalization shall be calculated by using a 12 month moving average of the market
capitalization over a period of six months immediately preceding the date of application. For
the purpose of calculating the market capitalization over a 12 month period, the average of the
weekly high and low of the closing prices of the shares as quoted on the National Stock
Exchange during the last twelve months and if the shares are not traded on the National Stock
Exchange such average price on any of the recognized Stock Exchanges where those shares are
frequently traded shall be taken into account while determining market capitalization after
making necessary adjustments for Corporate Action such as Rights / Bonus Issue/Split.
3. In case of Existing companies listed on other stock exchanges, the requirement of Rs.25
crores market capitalization shall not be applicable to listing of securities issued by Government
Companies, Public Sector Undertakings, Financial Institutions, Nationalized Banks, Statutory
Corporations and Banking Companies who are otherwise bound to adhere to all the relevant
statutes, guidelines, circulars, clarifications etc. that may be issued by various regulatory
authorities from time to time
4. Net worth means paid-up equity capital + reserves excluding revaluation reserve -
miscellaneous expenses not written off - negative balance in profit and loss account to the
extent not set off.
5. Promoters mean one or more persons with minimum 3 years of experience of each of them
in the same line of business and shall be holding at least 20 % of the post issue equity share
capital individually or severally.
6. In case a company approaches the Exchange for listing within six months of an IPO, the
securities may be considered as eligible for listing if they were otherwise eligible for listing at
the time of the IPO. If the company approaches the Exchange for listing after six months of an
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IPO, the norms for existing listed companies may be applied and market capitalization be
computed based on the period from the IPO to the time of listing.
Traditionally, settlement system on Indian stock exchanges gave rise to settlement risk due to
the time that elapsed before trades were settled. Trades were settled by physical movement of
certificates. This had two aspects: First related to settlement of trade in stock exchanges by
delivery of shares by the seller and payment by the buyer. The stock exchange aggregated
trades over a period of time and carried out net settlement through the physical delivery of
securities. The process of physically moving the securities from the seller to his broker to
Clearing Corporation to the buyer’s broker and finally to the buyer took time with the risk of
delay somewhere along the chain. The second aspect related to transfer of shares in favour of
the purchaser by the issuer. This system of transfer of ownership was grossly inefficient as
every transfer involved the physical movement of paper securities to the issuer for registration,
with the change of ownership being evidenced by an endorsement on the security certificate. In
many cases the process of transfer took much longer than the two months as stipulated in the
Companies Act, and a significant proportion of transactions ended up as bad delivery due to
faulty compliance of paper work. Theft, forgery, mutilation of certificates and other
irregularities were rampant, and in addition the issuer had the right to refuse the transfer of a
security. Thus, the buyer did not get good title of the securities after parting with good money.
All this added to costs and delays in settlement, restricted liquidity and made investor grievance
redressal time-consuming and at times intractable.
To obviate these problems, the Depositories Act, 1996 was passed to provide for the
establishment of depositories in securities with the objective of ensuring free transferability of
securities with speed, accuracy and security by:
• making securities of public limited companies freely transferable subject to certain
• dematerializing the securities in the depository mode; and
• Providing for maintenance of ownership records in a book entry form.
In order to streamline both the stages of settlement process, the Depositories Act envisages
transfer of ownership of securities electronically by book entry without making the securities
move from person to person. The Act has made the securities of all public limited companies
freely transferable by restricting the company’s right to use discretion in effecting the transfer
of securities, and dispensing with the transfer deed and other procedural requirements under
the Companies Act.
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A depository holds securities in dematerialized form. It maintains ownership records of
securities and effects transfer of ownership through book entry. By fiction of law, it is the
registered owner of the securities held with it with the limited purpose of effecting transfer of
ownership at the behest of the owner. The name of the depository appears in the records of
the issuer as registered owner of securities. The name of actual owner appears in the records of
the depository as beneficial owner. The beneficial owner has all the rights and liabilities
associated with the securities. The owner of securities intending to avail of depository services
opens an account with a depository through a depository participant (DP). The securities are
transferred from one account to another through book entry only on the instructions of the
In order to promote dematerialization of securities, NSE joined hands with leading financial
institutions to establish the National Securities Depository Ltd. (NSDL), the first depository in
the country, with the objective of enhancing the efficiency in settlement systems as also to
reduce the menace of fake/forged and stolen securities. This has ushered in an era of
dematerialized trading and settlement. SEBI has made dematerialized settlement mandatory in
an ever-increasing number of securities in a phased manner, thus bringing about an increase in
the proportion of shares delivered in dematerialized form. This was initially introduced for
institutional investors and was later extended to all investors.
Pursuant to the SEBI directive on providing facility for small investors holding physical shares in
the securities mandated for compulsory demat, the Exchange has provided such facility for
trading in physical shares not exceeding 500 shares in the Limited Physical (LP) market segment.
Primarily all trades are now settled in dematerialized form. The share of demat delivery in total
delivery at NSE increased to almost 100% in value terms.
NSE introduced for the first time in India, fully automated screen based trading. It uses a
modern, fully computerized trading system designed to offer investors across the length and
breadth of the country a safe and easy way to invest.
4.3 TRADING IN NSE
The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully
automated screen based trading system, which adopts the principle of an order driven market.
Trading on the equities segment takes place on all days of the week (except Saturdays and
4.3.1 MARKET TIMINGS
holidays declared by the Exchange in advance). The market timings of the equities
Normal Market Open : 09:15 hours
Normal Market Close : 15:30 hours