Equities cash & derivative

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Equities cash & derivative

  1. 1. Intern Ship Project On: 2010 Author: ID MOHAMMAD Email: idkhan2003@gmail.com EQUITY: CASH & DERIVATIVE
  2. 2. ID MOHAMMAD (idkhan2003@gmail.com) Page 2 Acknowledgement 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 meaningful. 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 organization.
  3. 3. ID MOHAMMAD (idkhan2003@gmail.com) Page 3 DECLARATION 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 Date:
  4. 4. ID MOHAMMAD (idkhan2003@gmail.com) Page 4 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) Sales Manager India Infoline Ltd.
  5. 5. ID MOHAMMAD (idkhan2003@gmail.com) Page 5 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) Associate Professor USMS, GGSIPU
  6. 6. ID MOHAMMAD (idkhan2003@gmail.com) Page 6 Contents Table Of Contents COMPANY PROFILE...................................................................................................................................7 INTRODUCTION TO INDIAINFOLINE......................................................................................................7 MILESTONES..................................................................................................................................................9 VISION........................................................................................................................................................10 MISSION.....................................................................................................................................................10
  7. 7. ID MOHAMMAD (idkhan2003@gmail.com) Page 7 COMPANY PROFILE 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 dedicated professionals. 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 (NSE). 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,
  8. 8. ID MOHAMMAD (idkhan2003@gmail.com) Page 8 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 subsidiaries. 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.
  9. 9. ID MOHAMMAD (idkhan2003@gmail.com) Page 9 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. MILESTONES 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.
  10. 10. ID MOHAMMAD (idkhan2003@gmail.com) Page 10 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 money. 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.” VISION “To become a full-fledged financial services company known for its quality of advice, personalized services and cutting edge technology” MISSION 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. COMPANY PHILISOPHY 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. COMPANY STRUCTURE
  11. 11. ID MOHAMMAD (idkhan2003@gmail.com) Page 11 Mr. Nirmal jain (Chairman and Managing Director) KEY EXECUTIVES: 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) Business strategy Company Strategies: ⇒ 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. Customer strategy ⇒ 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. People strategy ⇒ Attract exceptionally talented and driven people ⇒ Ensure a conducive environment ⇒ Share ownership liberally
  12. 12. ID MOHAMMAD (idkhan2003@gmail.com) Page 12 Mumbai GLOBAL PRESENCE 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. Dubai India Infoline Commodities DMCC - Broking member of the Dubai Gold and Commodities Exchange (DGCX). Newyork IIFL Inc. - 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. Singapore 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 member. IIFL Capital Pte Ltd - Exempt Financial Advisor regulated by the Monetary Authority of Singapore. Colombo 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
  13. 13. ID MOHAMMAD (idkhan2003@gmail.com) Page 13 EQUITIES 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 risk profile. 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. COMMODITIES 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
  14. 14. ID MOHAMMAD (idkhan2003@gmail.com) Page 14 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 against Gold. INSURANCE 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 others. 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. INVESTMENT BANKING 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.
  15. 15. ID MOHAMMAD (idkhan2003@gmail.com) Page 15 INTRODUCTION CHAPTER-1 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 efficient use. 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
  16. 16. ID MOHAMMAD (idkhan2003@gmail.com) Page 16 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 shares. 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.
  17. 17. ID MOHAMMAD (idkhan2003@gmail.com) Page 17 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.
  18. 18. ID MOHAMMAD (idkhan2003@gmail.com) Page 18 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 DATA COLLECTION 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. RESEARCH DESIGN 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.
  19. 19. ID MOHAMMAD (idkhan2003@gmail.com) Page 19 CHAPTER-2 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, 2002. 2.1 INTRODUCTION 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
  20. 20. ID MOHAMMAD (idkhan2003@gmail.com) Page 20 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
  21. 21. ID MOHAMMAD (idkhan2003@gmail.com) Page 21 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 markets. 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
  22. 22. ID MOHAMMAD (idkhan2003@gmail.com) Page 22 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
  23. 23. ID MOHAMMAD (idkhan2003@gmail.com) Page 23 only if such contracts are traded on a recognised stock exchange, thus precluding OTC derivatives. 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 derivative contracts. 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
  24. 24. ID MOHAMMAD (idkhan2003@gmail.com) Page 24 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 (SAT). 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 INDIAN SECURITIES MARKET DEA DCA RBI SEBI
  25. 25. ID MOHAMMAD (idkhan2003@gmail.com) Page 25 CHAPTER-3 PRIMARY MARKET 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 development. 3.1 INTRODUCTION 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
  26. 26. ID MOHAMMAD (idkhan2003@gmail.com) Page 26 the minimum number of shares and it has to fix the date of opening and closing of subscription list. 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.
  27. 27. ID MOHAMMAD (idkhan2003@gmail.com) Page 27 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
  28. 28. ID MOHAMMAD (idkhan2003@gmail.com) Page 28 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 shareholder. 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.
  29. 29. ID MOHAMMAD (idkhan2003@gmail.com) Page 29 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 process: 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
  30. 30. ID MOHAMMAD (idkhan2003@gmail.com) Page 30 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.
  31. 31. ID MOHAMMAD (idkhan2003@gmail.com) Page 31 CHAPTER 4 SECONDARY MARKET 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 4.1 INTRODUCTION 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
  32. 32. ID MOHAMMAD (idkhan2003@gmail.com) Page 32 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.
  33. 33. ID MOHAMMAD (idkhan2003@gmail.com) Page 33 Recognizesd Stock Exchange Table 4.1: Turnover of Regognized Stock Exchange in India 2008-09 2009-10 Percentage share (2009-10) Ahmedabad BSE Bangalore Bhubaneswar Cochin Coimbatore Delhi Gauhati ISE Jaipur Calcutta Ludhiana Madras MPSE NSE OTCEI Pune UPSE Vadodara Nil 11,00,074 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 27,52,023 Nil Nil 89 Nil Nil 13,78,809 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 41,38,023 Nil Nil 25 Nil Nil 24.99 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 74.98 Nil Nil 0.00 Nil 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.
  34. 34. ID MOHAMMAD (idkhan2003@gmail.com) Page 34 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
  35. 35. ID MOHAMMAD (idkhan2003@gmail.com) Page 35 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 instruments/products, 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 professionals, and 6) dealing with an organization which is constantly striving to move towards a global marketplace in the securities industry. NEW MEMBERSHIP 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
  36. 36. ID MOHAMMAD (idkhan2003@gmail.com) Page 36 5. Capital Market (CM), Wholesale Debt Market (WDM) and Futures & Options (F&O) segment, 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. Particulars Table 4.2: Eligibility Criteria for Membership WDM Segment CM and F&O Segments CM and WDM Segments CM, WDM and F&O Segments Constitution Corporate/ Institutions Individuals/Firms /Corporate Corporate/ Institutions Corporate/ Institutions 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* Interest Free Security Deposit (IFSD) Rs. 150 lakh Rs. 125 lakh** Rs. 250 lakh Rs. 275 lakh** Collateral Security Deposit (CSD) - 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 directors should be graduates. Proprietor/ two partners/two directors should be graduates. Dealers should also have passed SEBI approved certification test for derivatives and NCFM Capital Market (Basic or Dealers) Module At least two directors should be graduates. Dealers should also have passed NCFM Capital Market (Basic or Dealers) Module At least two directors should be graduates. Dealers should also have passed SEBI approved certification test for derivatives and NCFM Capital Market (Basic or Dealers) Module 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 fund-based activity. * 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
  37. 37. ID MOHAMMAD (idkhan2003@gmail.com) Page 37 **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 LISTING CRITERIA 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 monetary assets; 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) years; 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. LISTING AGREEMENT 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:
  38. 38. ID MOHAMMAD (idkhan2003@gmail.com) Page 38 • 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. VOLUNTARY DELISTING • 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.
  39. 39. ID MOHAMMAD (idkhan2003@gmail.com) Page 39 • 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
  40. 40. ID MOHAMMAD (idkhan2003@gmail.com) Page 40 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 market. 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 March 2010. 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
  41. 41. ID MOHAMMAD (idkhan2003@gmail.com) Page 41 etc. are disseminated across the country thus minimizing scope for price manipulation or misuse. 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. LISTING CRITERIA: 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. Criteria Table 4.3: Listing Criteria for Companies on the CM Segment of NSE Initial Public Offerings (IPOs) Companies listed on other exchanges Paid-up Equity Capital (PUEC)/Market Capitalisation (MC) /Net Worth 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 financial years. Company/Promoter's Track Record 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 / Distributable Profits -- 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 yrs. a) No disciplinary action by other stock exchanges/regulatory authority in past 3 yrs. (b) Satisfactory redressal mechanism for
  42. 42. ID MOHAMMAD (idkhan2003@gmail.com) Page 42 (b)Satisfactory redressal mechanism for investor grievances, (c ) distribution of shareholding and (d) details of litigation record in past 3 years (e) Track record of Directors of the Company investor grievances, (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. Note: 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
  43. 43. ID MOHAMMAD (idkhan2003@gmail.com) Page 43 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. 4.2.6 DEMATERIALISATION 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 exceptions; • 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.
  44. 44. ID MOHAMMAD (idkhan2003@gmail.com) Page 44 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 beneficial owner. 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 Sundays and 4.3.1 MARKET TIMINGS holidays declared by the Exchange in advance). The market timings of the equities segment are: Normal Market Open : 09:15 hours Normal Market Close : 15:30 hours

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