Bombay stck exchange
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  • 1. STOCK EXCHANGESTOCK EXCHANGE is an organized market place, eithercorporation or mutual organization, where members of theorganization gather to trade company stocks or other securities. Stock Exchange also facilitates for the issue and redemption ofsecurities and other financial instruments including the payment ofincome and dividends. The trade on an exchange is only bymembers and stock broker who have a seat on the exchange. Some of the Stock Exchanges are --New York Stock Exchange (NYSE) --National Stock Exchange (NSE) --Bombay Stock Exchange (BSE) --Regional Stock Exchange (RSE) Stock Exchange being a very vast topic, we are focusing onBOMBAY STOCK EXCHANGE (BSE). 1
  • 2. BOMBAY STOCK EXCHANGE (BSE)The Bombay Stock Exchange Limited, (formerly, the StockExchange, Mumbai; popularly called as BSE) is the oldest StockExchange in Asia with a rich heritage. It is located at Dalal Street,Mumbai, India. BSE was established in 1875 as “The Native Share & StockBrokers”. It was the first Stock Exchange in the country to obtainpermanent recognition in 1956 from The Government of Indiaunder The Securities Contracts (Regulation) Act 1956. There arearound 3500 Indian companies listed with Stock Exchange and hasa significant trading volume. The Exchange is professionally managed under the over alldirection of the Board Of Directors. The Board comprises eminentprofessional, representative of Trading Members and the ManagingDirectors of the Exchange. The Board is inclusive & is designed tobenefit from the participation of market intermediaries. As of July ’05, the market Capitalization of BSE was aboutRs.20 Trillion (US $466 Billion). As of 2005, it is among the fivebiggest Stock Exchanges in the world in terms of transactionsvolume. Along with NSE, the companies listed on BSE have acombined market Capitalization of US $125.5 Billion. 2
  • 3. NEED FOR BSEBSE is one of the factors Indian Economy depends upon. BSE has playeda major role in the development of the country. Through BSE, ForeignInvestors have invested in India. Due to inward flow of foreign currencythe, the Indian economy have started showing the upward trendtowards the development of the country.BSE provides employment for many people. Trading in BSE is also abusiness for a few, their family income depends on it, that is the reasonwhy when scandals occur in the stock market it not only affects thecompanies listed but also affects many families. In the few extremecases, it is observed that the bread winner of a family tends to suicidedue to the losses occurred.In most of major industrial cities all over the world, where thebusinesses were evolving and required investment capital to grow andthrive, stock exchanges acted as the interface between Suppliers andConsumers of capital. One of the key advantages of the stockexchanges is that they are efficient medium for raising resources andchanneling savings from the general public by the way of issue of Equity/ Debt Capital by joint stock companies which are listed on stockexchanges.Not to forget that the taxes and other statutory charges paid by BSE aresubstantial and make a sizeable contribution to the Governmentexchequer (Financial resources; funds). For example, transactions onthe stock exchanges are subject to stamp duties, which is paid to theState Government. The annual revenue from this source ranges from Rs75 – 100 croresWith the opening up of the financial markets to Foreign Investors anumber of foreign institutional investors and brokers have established asizeable presence in Mumbai. 3
  • 4. With no doubt we can clearly state without BSE, the Indian Economywould have been a complete different story. Various companies wouldn’thave been a strong and successful as they are today and the brokersand traders would have been elsewhere.BSE is an asset to our country and its existence plays a vital role inmany people’s life who depends on it. Indeed, BSE has made a majorcontribution to the industrial and economic development of India. 4
  • 5. FUNCTIONS OF BSEThe Stock Market is a pivotal institution in the financial system. Awell-ordered stock market performs several economic functions: • It ensures the measure of safety and fair dealing • It performs an ‘act of magic’ by translating short-term investments into long-term funds for companies. • It directs the flow of capital in the most profitable channels. • It induces companies to raise their standard of performance. • It offers guidance to management about the cost of capital.Measure of Safety and Fair Dealing:The stock exchanges operate under a regulatory framework whichseeks to protect the interest of investors. The rules, regulations,and bye-laws of a stock exchange, which are approved by thecentral government, are meant to ensure that a reasonablemeasure of safety is provided to investors and transactions takeplace in competitive conditions which are fair to all concerned.Act of Magic:Most of the investors are interested in short-term investments. Therequirements of companies are, however, long-term in nature—theyrequire equity capital on a more or less permanent basis anddebenture capital for 3 to 15 years. Thanks to the negotiability andtransferability of securities, through the stock market, it is possiblefor companies to obtain their long-term requirements frominvestors with short-term horizons. While one investor issubstituted by another when a security is transacted, the companyis assured of availability of funds. 5
  • 6. Flow of Capital in the Most Profitable Channels:Companies which have more profitable investment opportunities arenormally able to raise substantial funds through the stock market,whereas companies which do not have such opportunities arenormally not able to do so. As a result, the stock market facilitatesthe direction of the flow of capital in the most profitable channels.Inducement to Companies to Raise their Standard ofPerformance:When the equity, capital of a company is listed on a stockexchange, the performance of the company is reflected in themarket price of the equity stock, which is readily available for publicconsumption. Put differently, the company’s performance is more‘visible’ in the eyes of public. Such a public exposure normallyinduces companies to raise their standard of performance.Guidance of Cost of Capital:The market value of the securities of company are required forcomputing its cost of capital. Such values can be obtained fromstock market quotations. Hence the stock market offers guidanceon cost of capital.LISTING OF THE COMPANIES ON STOCK EXCHANGE 6
  • 7. Public Limited Company. • Public Listed Company • Public Non-listed Company‘Listed Company’ means a public ltd Co which is --Listed on any one or more recognized stock exchanges in India. --Securities (shares: debentures) of such company are traded on such stock exchanges.‘Unlisted company’ therefore means a company whose securitiesare not listed on any of recognized stock exchanges in India.Why Companies get Listed with Stock Exchange?Companies get listed with Stock Exchange for following reasons:--Securities are freely transferable.--Easy liquidity of securities.--Easy availability of prices of securities.--Reputation, Image, Goodwill.--Public awareness.--More transparency.--Helps in obtaining loans from Banks/Institutions.--Helps in marketing its Products. In order to list securities of a company & get its shares traded on any recognized stock exchanges, the Public Ltd Company may either come out wit ha public issue (i.e. to offer further securities to public) or make an offer for sale of existing securities to 7
  • 8. public. This can be done by issuing of Prospectus & Complyingwith all The Provinces of Company Act 1956.Each stock exchange has its own criteria for listing securitieswhich should also be met.Eg: If company intends to get listed its securities in BombayStock Exchange, Mumbai post issue capital (paid up capital afterproposed public issue) of such companies should be Rs. 10Crores atleast.The Company enters into a listing agreement with concernedstock exchange & on receipt of permission from concerned StockExchange, company is listed and securities are thereafter tradedon such stock exchange. TRADING & SETTLEMENT 8
  • 9. Demat Account is a compulsory Account for traders who want totrade in stock market. This account is mainly used for buying andselling of shares.Trading:Each Stock Exchange has listed and permitted securities that aretraded on it. There are two ways of organizing the trading activity.Open Outcry SystemUnder the open outcry system traders shout and resort to signalson the trading floor of the exchange which consists of several‘notional’ trading posts for different securities. A member (or hisrepresentative) wishing to buy or sell a certain security, reaches thetrading post where the security is traded. Here, he comes in contactwith others interested in transacting in that security. Buyers maketheir bid and sellers make their offers and bargains are closed atmutually agreed-upon prices. In stock where jobbing is done, thejobber plays an important role. He stands ready to buy or sell onhis account. He quotes his bid (buying) and ask (selling) prices. Heprovides some stability and continuity to the market.Screen Based SystemIn the screen-based system the trading ring is replaced by thecomputer screen and distant participants can trade with each otherthrough the computer network. A large screen based tradingsystem (a) enhances the informational efficiency of the market asmore participants trade at a faster speed; (b) permits the marketparticipants to get a full view of the market, which increases theirconfidence in the market; and (c) establishes transparent audittrails.Settlement: 9
  • 10. The settlement of transactions is done on a settlement period basis.Earlier, the settlement period on the Indian Stock Exchanges was 7days, but now it is T+1 settlement. T+1 includes the day of tradeand an additional day. During a settlement period, buying andselling transactions in a particular security can be squared up.Square off is a same day settlement cycle. At the end of settlementperiod, transactions are settled on net basis. Since the settlementperiod used to be 7 days and the settlement is for the net position,most of the transactions are squared within the settlement period.Clearly these transactions are motivated by a desire to profit fromprice variations within the settlement period.Traditionally, trades have been settled by physical delivery. Thismeans that the securities have to physically move from the seller tothe seller’s broker, from the seller’s broker to the buyer’s broker(through the clearing house of the exchange or directly), and fromthe buyer’s broker to the buyer. Further the buyer has to lodge thesecurities with the transfer agents of the company and the processof the transfer may take one to three months. This leads to highpaperwork cost and creates bad paper risks.To mitigate the cost and the risks associated with the physicaldelivery, settlement in the developed securities market is mainlythrough electronic delivery facilitated by depositories. A ‘depository’is an institution which immobilizes physical certificates (ofsecurities) and effect transfers of ownership by electronic bookentry. A beginning in the direction of electronic delivery has beenmade in India with the establishment of the National SecuritiesDepository Limited (NSDL), India’s first depository, in 1996. AsNSDL expands its operations and as new depositories come intobeing, settlement will progressively be done more by electronicdelivery and less by physical delivery. INVESTMENT 10
  • 11. Investment means the use of money for the purpose of makingmore money, to gain income or increase capital, or both. • Short Term Investment • Long Term InvestmentShort Term Investment:It is more riskyA successful short term trading mindset instead requires irondiscipline, intense focus and steely devotion.Short term trading can be divided in 3 sections • Day Trading • Swing Trading • Position TradingDay TradingDay traders buy and sell stocks throughout the day in the hope thatthe price of the stocks will fluctuate in value during the day,allowing them to earn quick profits. A day trader will hold a stockanywhere from a few seconds to few hours, but will always sell allof those stocks close of the day. The day trader will therefore notown any position at the close of the each day, and there isovernight risk. The objective of day trading is to quickly get in andout of any particular stock for profits anywhere from few cents toseveral points per share on an intra-day basis. Day trading can befurther sub-divided into number of styles, including.Scalpers: This style of day trading involves the rapid and repeatedbuying and selling of a large volume of stocks within seconds orminutes. The objective is to earn a small per share profit on eachtransaction while minimizing the risk. 11
  • 12. Momentum Traders: This style of day trading involves identifying andtrading stocks that are in a moving pattern during the day, in anattempt to buy stocks at bottoms and sell at tops.Swing TradingThe principal difference between day trading and swing trading is thatswing traders will normally have a slightly longer time horizon than daytraders for holding a position in a stock. As is the case with day traders,swing traders also attempt to predict the short term fluctuation in astock’s price. However swing traders are willing to hold the stocks formore than one day, if necessary, to give to stock price some time tomove or to capture additional momentum in the stock’s price. Swingtraders will generally hold on to their stock positions anywhere from afew hours to several days.Swing trading has the capability of providing higher returns than daytrading. However, unlike day traders who liquidate their positions at theend of each day, swing traders assume overnight risk. There are somesignificant risks in carrying positions overnight. For example newsevents and earnings warnings announced after the closing bell canresult in large, unexpected and possibly adverse changes to a stockspricePosition TradingPosition trading is similar to swing trading, but with a longer timehorizon. Position traders hold stocks for a time period anywhere fromone day to several weeks or months. These traders seek to identifystocks where the technical trends suggest a possible large movement inprice is likely to occur, but which may not be fully played out for severalweeks or months.Long Term Investment:A successful long term trading mindset requires, above all, patience andperseverance. These are more difficult attributes to develop in the 12
  • 13. average trader. Too often the average short-term trader succumbs tothe markets lure and develops a frantic, get-it-now mindset believingevery price blip represents a trading opportunity. As this attitude isfanned by the media and brokerage industry, more and more long termtraders have become aggressive swing traders and swing tradersbecome rabid day traders - more often than not with disastrousconsequences.Long term trading results in less trades with fewer mistakes and lowercommission and slippage costs because overtrading is one of the biggestsources of losses facing both new and established traders. Why is thisso? Obviously, more trades mean more commissions and more slippage.Few short-term traders realize, however, that their total commissionand slippage costs in any year often exceed their total losses for theyear. In other words, many losing short-term traders would haveactually made money on an annual basis had they not incurred theexorbitant commission and slippage costs of trading throughout theyear. Fewer trades mean fewer mistakes.Long term trading unlike short term requires dramatically reduced timefor analysis and trading. If you are trading using weekly data, only oneto two hours each weekend are required to implement a sophisticatedlong term trading system for 21 or more commodities. This includes thetime to completely download your quotes and update your data files,verify which are the correct months to trade for each commodity, figureout if you have any positions to rollover, generate your trading signals,and write down orders to your broker. On the contrary a typicalsuccessful day trader literally becomes a slave to their quote machinesduring market hours. FACTORS AFFECTING BSEThere are various factors that affects BSE: 13
  • 14. (a) THE KETAN PAREKH SCAMKetan Parekh was a graduate from HR College and CA by profession.Ketan Parekh’s scam was often referred to as the one-man army orPentafour Bull. The 176-point Sensex crash on March 1, 2001 came as amajor shock for the Government of India, the stock markets and theinvestors alikeThis sudden crash in the stock markets prompted the SecuritiesExchange Board of India (SEBI) to launch immediate investigations intothe volatility of stock markets.The scam shook the investors confidence in the overall functioning ofthe stock markets. By the end of March 2001, at least eight people werereported to have committed suicide and hundreds of investors weredriven to the brink of bankruptcy.The first arrest in the scam was of the noted bull, Ketan Parekh (KP), onMarch 30, 2001, by the Central Bureau of Investigation (CBI). Soon,reports abounded as to how KP had single handedly caused one of thebiggest scams in the history of Indian financial markets. He was chargedwith defrauding Bank of India (BoI) of about $30 million among othercharges.KPs arrest was followed by yet another panic run on the bourses andthe Sensex fell by 147 points. By this time, the scam had become thetalk of the nation, with intensive media coverage and unprecedentedpublic outcry.Bank of India along with Punjab National Bank and SBI were at thereceiving end. Madhavapura Bank and Classic Cooperative Bank are theothers affected. Ketan Parekh owes around Rs1.3bn to the Bank of IndiaKP’s scam was one of the major scam in India after Harshad Mehtawhich lost the confidence of investors in investing in share market. KP’sscam is also regarded as one mans army scam.(b) FOREIGN INSTITUTIONAL INVESTORS (FII) 14
  • 15. Foreign investment refers to investments made by residents of acountry in another country’s financial assets and productionprocesses. After the opening up of the borders for capitalmovement, foreign investments in India have grown enormously. Itaffects the productivity factor of the beneficiary or the receivercountry and has the potential to create a ripple effect on thebalance of payments of that country. In developing countries likeIndia, foreign capital helps in increasing the productivity of laborand to build up foreign exchange reserves to meet the currentaccount deficit. It provides a channel through which these countriescan have access to foreign capital.Foreign investment can be of two forms: Foreign direct investment(FDI) and Foreign portfolio investment (FPI).FDI involves directproduction activity and has a medium to long term investmentplans. In contrast the FPI has a short term investment horizon.They mostly investment in the financial markets which consist ofForeign Institutional Investors (FIIs). They invest in domesticfinancial markets like money market, stock market, foreignexchange market etc.According to Michael Frenkel and Lukas Menkhoff, “FIIs arebeneficial for an economy under specific institutional conditions. Itis defining characteristic of an emerging market that theseconditions are often not met”.Foreign institutional investors ‘investments are volatile in nature,and they mostly invest in the emerging markets. They usually keepin mind the potential of a particular market to grow.FII has lead a significant improvement in India relating to the flowof foreign capital during the period of post economic reforms. Theinflow of FII investments has helped the stock market to raise at agreater height according to financial analysts. Sensex touched anew height. It crossed 10000-mark in January 2006, which was8073 on November 2, 2005, and 9323 in December 2005FII participation in the Indian stock market triggers its upwardmovement, but, at the same time, increased liquidity through FIIinvestment inflow increases volatility too.FIIs’ IMPACT ON THE INDIAN ECONOMY. 15
  • 16. The Ashok Lahiri Committee Report on encouraging FII Flows (Ministryof Finance, the Government of India) mentions some reasons for theneed of FII flows. FII flows supplement and augment domestic savingsand domestic investment without increasing the foreign debt of ourcountry. Capital inflows to the equity market increase stock prices lowerthe cost of equity capital and encourage investment by Indian firms.The Indian stock markets are both shallow and narrow and themovement of stocks depends on limited number of stocks. As FIIspurchases and sells these stocks there is a high degree of volatility inthe stock markets. If any set of development encourages outflow ofcapital that will increase the vulnerability of the situation. The highdegree of volatility can be attributed to the following reasons: • The increase in investment by FIIs increases stock indices in turn increases the stock prices and encourages further investments. In this event when any correction takes place the stock prices declines and there will be full out by the FIIs in large number as earning per share declines. • The FIIs manipulate the situation of boom in such a manner that they wait till the index raises up to a certain height and exit at an appropriate time. This tendency increases the volatility further.So even though the portfolio investment by FIIs increases the flow ofmoney in the economic system, it may create problems of inflation. TRANSFORMATION OF THE STOCK EXCHANGE, MUMBAI TO BSE LTD.The change in the name of Asias oldest stock exchange, from the StockExchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of 16
  • 17. more than cosmetic significance. Along with the change in name comesa new perspective, one brought about by a comprehensive change in itsownership and management. Until now, the BSE like most otherexchanges in India was owned and managed by brokers, who also hadthe sole right to trade in the exchanges. Conflicts of interest were boundto arise in such situations. Until the advent of the National StockExchange in 1994, the BSE was Indias pre-eminent exchange,accounting for an overwhelmingly large proportion of the share markettransactions of the country. Companies wherever located were advisedto seek a listing of their shares on the BSE so that they could haveaccess to its large reservoir of capital and investor base. Legallyspeaking, it was enough if they listed their shares on any one of theregional stock exchanges, closest to their registered office. This lastrule, like so many others connected with the securities market, had tobe discarded in the wake of the sweeping changes in the financialmarkets since the 1990s. Perceptions of both investors and regulatorschanged dramatically forcing the stock exchanges to overhaulthemselves.A series of securities scams through the 1990s in which brokers wereinvariably held accountable, the inability of the broker-dominatedexchanges to check malfeasance, and a vastly expanding role for thecapital market in the national economy necessitated a thorough reviewof the age-old stock market structure. In the new demutualised andcorporatised exchanges that came about as part of a major capitalmarket reform a time-bound program for 10 other exchanges has sincebeen announced — the right to trade is segregated from the right toown and manage the exchange. The transition is not going to be easy asit involves the imparting of a much greater degree of professionalism.Stock market professionals from outside the broking community arereportedly in short supply. By far the biggest unknown factor relates tothe future ownership of the exchange. Brokers will cede control andinvestors including retail ones will hold a substantial portion of theexchanges equity. Apart from this being totally new to India, it doesraise the possibility of other conflicts of interest including the oneconnected with the listing of its own shares. CONCLUSIONWith the increasing Globalization, the Stock Exchange’s havetremendously affected the financial conditions of India. 17
  • 18. The stock markets of the future will have a redefined pupose andreinvented architecture due to the advent and widespread use oftechnology. Information and stock price quotations are availablealmost instantaneously, and, more importantly, investors can act onthis data by executing a trade from anywhere at anytime. This newmarket will bring benefits to investors, the listed companies, andthe economies of the company. Trading will become cheaper, fasterand settlement will be simpler wit reduced risk. Raising capital forcompanies will become easier, thereby contributing directly to theEconomic Growth.Already, BSE has shown its proactive response by increasinglyusing leading edge to technologies to effectively compete in theglobal environment. In the not too distant future, once full capitalaccount convertibility is permitted in India, one could well witnessan expansion of trading volumes and its resultant economic benefitsto the thriving and ever young metropolis of Mumbai.Inspite of all these positive predictions, the future of StockExchanges is likely to be uncertain and even their survival is amajor question mark. BIBLIOGRAPHYThe information provided in this project have been taken from thefollowing sources: 18
  • 19. WEBSITES • www.indiainfoline.com • www.countercurrents.org • www.icfai.org • www.bseindia.com • www.moneycontrol.com • www.indlaw.com • www.sebi.gov.in • www.bombayfirst.orgBOOKS • Fundamentals Of Financial Management –PRASANNA CHANDRA • Portfolio Organizer ( The ICFAI University Press) – Edition : Dec’05, Mar’06, May’06, Jun’06 19