2. Module 7 – Secondary Market
• Topics
– Introduction
– Evolution of Country Stock Exchanges
– Functions of Country Stock Exchanges
– Regulatory Body of the Capital Market of the Country
– Recent Guidelines of SEBI
4. Secondary Market- Definition
• Definition – Secondary markets is a market,
where existing securities are sold and bought
among investors or traders, usually on a
securities exchange, over the counter or
elsewhere.
• Stock Market represent the security market
where existing securities(Shares and
Debentures). It is an organised mechanism
for purchase and sale of existing securities.
5. Secondary Market- Functions
• Functions of the Secondary Market
– Facilitate liquidity and marketability of the outstanding
equity and debt instrument.
– Contribute to economic growth through allocation of funds
to the most efficient channel through the process of
disinvestment to reinvestment.
– Provide instant valuation of securities which facilitate the
measurement of the cost of capital and the rate of return.
– Induce Companies to improve performance as the market
price at the stock exchanges reflects the performance and
market price is readily available to investors.
7. Stock Exchange - Definition
• Definition – As per Securities Contract
(Regulation) Act, 1956, Stock Exchange is
defined as any body of individuals,
whether incorporated or not, constituted
for the purpose of assisting, regulating or
controlling the busines of buying, selling in
securities under cerain rules and
regulations.
8. Stock Exchange- Characteristics
• Characteristics or Salient Features of Stock
Exchange
– It is a place where securities are purchased or sold
– A Stock exchange is an association of persons
whether incorporated or not.
– The trading in a stock exchange is strictly regulated
and rules and regulations prescribed for various
transactions
– Both genuine investors and speculators buy and sell
shares.
– The securities of corporation, trusts, governments,
municipal corporations etc. are allowed to be dealt at
stock exchange.
9. Stock Exchange - Functions
• The Stock Exchanges play an important role
in the economic development of a country.
• Important Functions of a Stock Exchange
– Ensures liquidity of capital – The stock
exchanges provide a ready market where buyers
and sellers are readily available and shares and
stocks are converted into cash easily.
– Continuous market for securities - Provide a
regular and ready market for trading in securities.
Securities once listed continue to be traded at the
exchange irrespective of the fact that owners go
on changing.
10. Stock Exchange - Functions
– Mobilising Surplus Funds – The stock is a ready market
for various securities and hence investors do not find any
difficulty in investing their surplus funds or savings by
purchasin shares and bonds etc. from the exchanges.
– Safety in dealings - Dealins at Stock exchanges are
governed by well defined rules and regulations of SCRA,
1956. No scope for manipulating transactions and hence
this safety in dealings bring confidence in the minds of all
concerned parties.
– Listing of Securities – Only listed securities can be
purchased at stock echanges and the listing is allowed
only after critical examination of capital structure,
management and prospects of the companies.
11. Stock Exchange - Functions
– Platform for Public Debt – The stock exchange provide a
platform for raising public debts. These are organised
markets for government securities, however there is no
provision for a separate counter to handle these securities.
– Clearing House of Business Information – The
companies listed at stocj exchanges have to procide
financial statements, annual reports etc. to ensure
maximum publicity of corporation operations and working.
Hence Stock exchanges provide economic and company
specific information to the investors and help companies
decide their policies.
– Evaluation of Securities – The investors can evaluate the
worth of their holdings from the prices quoted at different
exchanges. Hence these are helpful in evaluating any type
of security listed there.
12. Stock Exchange - Evolution
• The evolution/development of stock
exchanges divided into 2 parts
– Pre Reform Era
– Post Reform Era
13. Stock Exchange – Pre Reform Era
• Pre Reform Era – Marks the advent of the stock
exchanges . Year(1850 to 1991)
– Origin dates back to the 18th century – long term
negotiable securities were issued
– Real beginning – beginning of the 19th century after
the enactment of the Companies Act in 1850 – which
introduced the feature of limited liability, and
generated investor interest in corporate securities.
– 1875 – The Native Share and Stock Brokers
Association(now Bombay Stock Exchange – BSE)
formed in Bombay(now Mumbai).
14. Stock Exchange – Pre Reform Era
– Followed the formation of Association/exchanges
in Ahmedabad(1894), Calcutta(now Kolkata) in
1908 and Madras(now Chennai)
– Till 1990 – Indian Secondary Market comprised
Regional Stock Exchanges with BSE heading the
list. The Indian market was plagued with many
limitations such as
• Uncertainty of execution prices.
• Uncertainty of delivery and settlement periods
• Lack of transparency
• High transaction costs.
• Absence of risk management
• Private off market deals
15. Stock Exchange – Post Reform Era
– These limitations led to the initiation of reforms in
the year 1991.
• Post Reform Phase (1991 onwards)
– Indian Secondary market has four tier structure
• Regional Stock Exchanges
• The National Stock Exchanges(BSE and NSE)
• The Over the Counter Exchange of India(OTCEI)
• The Inter Conneced Stock Exchange of India(ISE)
– NSE set up in 1994 – 1st modern exchange to
bring in new technology, new trading pracices,
new institutions and new products.
16. Stock Exchange – Post Reform Era
– The OTCEI was set up in 1992 – as a Stock
Exchange providin for small and medium sized
companies the means to generate capital
– The ISE – is the Stock exchange of stock exchanges
– The MCX Stock Exchange came up in September
2008
– The United Stock Exchange of India Limited(USE)
entered the market in July 2010. – fourth currency
futures exchange after BSE, NSE and MCX-SX.
• All the Stock Exchanges operate under the rules
and regulations approved by the government and
the SEBI.
17. Major Stock Exchanges in India
• Bombay Stock Exchange(BSE)
– Established in 1875 as a voluntary non-profit making
association in Mumbai as the “Native Share and
Stock Brokers Association”
– Asia’s oldest stock exchange and is a major stock
exchange in India
– It has evolved over the years as the premier stock
exchange in the country.
– It has evolved over the years as the premier stock
exchange in the country.
– First exchange in the country to have obtained
permanent recognition in 1956 from the Govt. of India
under the Securities Contracts (Regulation) Act, 1956.
18. Major Stock Exchanges in India
– Has the largest number of scripts listed.
– Uses BSE Online Trading System (BOLT) as
the electronic screen based trading system
nationwide.
– First Index launched by BSE was the BSE
Sensitive Index(SENSEX) in 1986.
– It comprises 30 scrips.
– Other Indexes were BSE National, a broader
index comprising 100 scrips, the BSE 200, the
Dollex, BSE IT Index etc.
19. Major Stock Exchanges in India
• National Stock Exchange(NSE)
– Incorporated in November 1992 with an equity
capital of Rs. 25 crores.
– A professionally managed national market for
shares, debentures and government securities
– India’s leading Stock Exchange covering 364
citites and towns across the country.
– NSE operates on the National Exchange for
Automated Trading(NEAT) system, a fully
automated screen based trading system.
– Brought about transparency, speed and
efficiency, safety and market integrity
20. Major Stock Exchanges in India
– Played a catalytic role in reforming the Indian
Securities market in terms of microstructure,
market practices and trading volumes.
– NSE Fifty was rechristened as S&P CNX Nifty
on July 28, 1998 – widely used to reflect the
state of market sentiments for 50 highly liquid
scrips.
– Other Indices include the CNX Nifty Junior,
S&P CNX Defy(Dollar denominated S&P CNX
Nifty), other S&P CNX Sectoral Indices such
as IT, Bank, Energy, Pharma etc
21. Important Terms
• Some Important concepts associated with
the Stock Exchanges in India-
– Listing of Securities
– Dematerialisation of Securities
– Depository
– Stock Market Index
22. Important Terms
• Listing of Securities – It means
permission to quote shares and debenture
officially on the trading floor of the stock
exchange.
– The stock exchanges fix certain standards
which the company must fulfill before getting
the securities listed.
23. Important Terms
• Dematerialisation of Securities –
Dematerialisation is the process wherein
share certificates or other securities held
in physical form are converted into
electronic form and credited to demat
account of an investor opened with a
depository participant.
24. Important Terms
• A Depository is a firm wherein the securities of an
investor are held in elecronic form in the snae way a
bank holds money. It carries out the transacion of
securities by means of book entry, without any physical
movement of securities.
• Depository Organisation
– NSDL – National Securities Depository Ltd.
• First depository organisation promoted by IDBI,
UTI and NSE
• It was setup to provide electronic depository
facilities for securities being traded in Capital
Market.
25. Important Terms
– CDSL – Central Depository Services(India)
Ltd.
• It commenced its operations during Feb, 1999.
• It was promoted by Mumbai Stock Exchange in
association with the leading banks such as the
State Bank of India, Bank of India, Bank of Baroda,
HDFC Bank, Standard Chartered Bank, Union
Bank of India and Centurion Bank.
• It was set up with the objective of providing
convenient, dependable and secure depository
services at affordable cost to all the market
participants.
26. Important Terms
• Stock Market Index –
– It is the most important indices of all as it measures
overall market sentiments through a set of stocks that
are representative of the market.
– It is a barometer of market behaviour.
– It reflects market direction and indicates day to day
fluctuations in stock prices. It relects the expectations
about the behaviour of the economy as a whole.
– Major Indices in India – BSE Sensex(comprises 30
shares and its base year is 1978-79) and NSE
Nifty(comprises 50 highly liquid shares and its base
period is 1995).
