CHAPTER-1

INTRODUCTION

A mechanism that allows trade is called a market. The original form of trade was

barter, the direct exchange of goods and services. Modern traders instead, generally negotiate

through a medium of exchange, such as money. As a result, buying can be separated from

selling, or earning. The invention of money (and later credit, paper money and non-physical

money) greatly simplified and promoted trade. Trade between two traders is called bilateral

trade, while trade between more than two traders is called multilateral trade. Trade exists for

many reasons. Due to specialization and division of labor, most people concentrate on a

small aspect of production, trading for other products. Trade exists between regions because

different regions have a comparative advantage in the production of some tradable

commodity, or because different regions' size allows for the benefits of mass production. As

such, trade at market prices between locations benefits both locations. Trading can also refer

to the action performed by traders and other market agents in the financial markets.

The only stock exchange operating in the 19th century were those of Bombay set up

in 1875 and Ahmedabad set up in 1894 these were organized as voluntary non-profit making

organization of brokers to regulate and protect interest. Before the control insecurities

trading became a central subject under the constitution in 1950, it was a state subject and the

Bombay securities contract (CONTROL) Act of 1952 used to regulate trade in securities.

Under this act, the Bombay stock exchange in 1927 and Ahmedabad in 1937.During the war

boom, a number of stock exchanges were organized in Bombay, Ahmedabad and other

centers, but they were not recognized. Soon after it became a central subject, central

legislation was proposed and a committee headed by A.D. Gorwala went in to the bill for

securities regulation. On the basis of committee’s recommendations and public discussions

the securities contracts (regulations) Act became law in 1956.

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SCOPE OF THE PROJECT

‘Investor can assess the company financial strength and factors that effect the

company. Scope of the study is limited. We can say that 70% of the analysis is proved

good for the investor, but the 30% depends upon market sentiment.

The topic is selected to analyses the factors that affect the future EPS of a company

based on fundamentals of the company.

The market standing of the company studied in the order to give a better scope to the

Analysis is helpful to the investors, share holders, creditors for the rating of the

company.

OBJECTIVES OF THE PROJECT

To study the nature and structure of capital market.

To know the functioning of co..

To perform the equity analysis.

To provide the way of approach for the investor to invest wisely in the market.

The purpose of doing this project is mainly to the facts - that affects the company

performance.

To assess the future EPS of the company.

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METHODOLOGY

PRIMARY SOURCE

Gathered information by co. journal (Associate Vice President), INDIa info.

SECONDARY SOURCE:

I referred EQUITY related articles from various magazines, newspapers and journals.

Material provided by co.

Browsing the concerned sites.

The collected data was analyzed by using graphs relative rating methods.

We did a sample survey for to find how many people aware of equity and how many people

invested in equity market.

LIMITATIONS OF THE PROJECT

Time constraint was a major limiting factor.

Forty five days were insufficient to even grasp the theoretical concepts.

Several other strategies that could have been studied were not done.

Lack of knowledge with the brokers.

Difference of theory from practice.

Absence of required knowledge and technology.

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CHAPTER-2

REVIEW OF LITERATURE

FINANCIAL MARKETS :

DEFINITION:

THE TERM FINANCIAL MARKETS CAN BE A CAUSE OF MUCH CONFUSION. FINANCIAL MARKETS COULD MEAN:

1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate

the trade in stocks, bonds and warrants.

2. The coming together of buyers and sellers to trade financial products. i.e. stocks and shares

are traded between buyers and sellers in a number of ways including: The use of stock

exchanges; directly between buyers and sellers etc. In academia, students of finance will use

both meanings but students of economics will only use the second meaning. Financial markets

can be domestic or they can be international.

TYPES OF FINANCIAL MARKETS

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common

stock, and enable the subsequent trading thereof. Bond markets, which provide

financing through the issuance of Bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities. Money markets,

which provide short term debt financing and investment.

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Derivatives markets, which provide instruments for the management of financial risk.

Futures markets, which provide standardized forward contracts for trading products at

some future date; see also forward market.

Insurance markets, which facilitate the redistribution of various risks.

Foreign exchange markets, which facilitate the trading of foreign exchange

Capital market

The capital market is the market for securities, where companies and the government can

raise long-term funds. The capital market includes the stock market and the bond market.

Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the

capital markets in their designated countries to ensure that investors are protected against

fraud. The capital markets consist of the primary market, where new issues are distributed to

investors, and the secondary market, where existing securities are traded.

The capital markets consist of primary markets and secondary markets. Newly formed

(issued) securities are bought or sold in primary markets. Secondary markets allow investors

to sell securities that they hold or buy existing securities.

SHARE

What is share?

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In finance a share is a unit of account for various financial instruments including stocks,

mutual funds, limited partnerships, and REIT’s. In British English, the usage of the word

share alone to refer solely to stocks is so common that it almost replaces the word stock itself

.In simple Words, a share or stock is a document issued by a company, which entitles its

holder to be one of the owners of the company. A share is issued by a company or can be

purchased from the stock market. By owning a share you can earn a portion and selling

shares you get capital gain. So, your return is the dividend plus the capital gain. However,

you also run a risk of making a capital loss if you have sold the share at a price below your

buying price.

A company's stock price reflects what investors think about the stock, not necessarily what the

company is "worth." For example, companies that are growing quickly often trade at a higher price

than the company might currently be "worth." Stock prices are also affected by all forms of company

and market news. Publicly traded companies are required to report quarterly on their financial status

and earnings. Market forces and general investor opinions can also affect share price.

Types of Shares:

1. Equity Shares: An equity share, commonly referred to as ordinary share, represents the

form of fractional ownership in a business venture.

What is an ‘Equity’/Share?

Total equity capital of a company is divided into equal units of Small denominations, each

called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is

divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus,

the company then is said to have 20,00,000 equity shares of Rs 10 each. The holders of such

shares are members of the company and have voting rights.

2. Rights Issue/ Rights Shares :

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The issue of new securities to existing shareholders at a ratio to those already held, at a price.

For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every

3 shares held at a price of Rs. 125 per share.

3. Bonus Shares :

Shares issued by the companies to their shareholders free of cost based on the number of

shares the shareholder owns.

4.Preference shares :

Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a

fixed rate to be paid regularly before dividend can be paid in respect of equity share. They

also enjoy priority over the equity shareholders in payment of surplus. But in the event of

liquidation, their claims rank below the claims of the company’s creditors,

bondholders/debenture holders. Shares of a firm that encompass preferential rights over

ordinary common shares, such as the first right to dividends and any capital payments.

5.Cummulative Preference Shares:

A type of preference shares on which dividend accumulates if remained unpaid. All arrears

of preference dividend have to be paid out before paying dividend on equity shares.

6.Cummulative Convertible Preference Shares:

A type of preference shares where the dividend payable on the same accumulates, if not paid.

After a specified date, these shares will be converted into equity capital of the company.

7. Bond :

Bond is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt

security is generally issued by a company, municipality or government agency. A bond

investor lends money to the issuer and in exchange, the issuer promises to repay the loan

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amount on a specified maturity date. The issuer usually pays the bond holder periodic

interest payments over the life of the loan. The various types of Bonds are as Follows:

Zero Coupon Bond:

Bond issued at a discount and repaid at a face value. No periodic interest is paid. The

difference between the issue price and redemption price represents the return to the holder.

The buyer of these bonds receives only one payment, at the maturity of the bond.

Convertible Bond :

A bond giving the investor the option to convert the bond in to equity at a fixed conversion

price.

Treasury Bills:

Short-term (up to one year) bearer discount security issued by government as a means of

financing their cash requirements.

DividendsIf you've ever owned stocks or held certain other types of investments, you might already be

familiar with the concept of dividends. Even those people who have made investments that

paid dividends may still be a little confused as to exactly what dividends are, however…

after all, just because a person has received a dividend payment doesn't mean that they fully

appreciate where the payment is coming from and what its purpose is. If you have ever found

yourself wondering exactly what dividends are and why they're issued, then the information

below might just be what you've been looking for.

Defining the Dividend

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Dividends are payments made by companies to their stock holders in order to share a portion

of the profits from a particular quarter or year. The amount that any particular stockholder

receives is dependent upon how many shares of stock they own and how much the total

amount being divided up among the stockholders amounts to. This means that after a

particularly profitable quarter a company might set aside a lump sum to be divided up

amongst all of their stockholders, though each individual share might be worth only a very

small amount potentially fractions of a cent, depending upon the total number of shares

issued and the total amount being divided. Individuals who own large amounts of stock

receive much more from the dividends than those who own only a little, but the total per-

share amount is usually the same.

When Dividends Are Paid

How often dividends are paid can vary from one company to the next, but in general they are

paid whenever the company reports a profit. Since most companies are required to report

their profits or losses quarterly, this means that most of them have the potential to pay

dividends up to four times each year. Some companies pay dividends more often than this,

however, and others may pay only once per year. The more time there is between dividend

payments can indicate financial and profit problems within a company, but if the company

simply chooses to pay all of their dividends at once it may also lead to higher per-share

payments on those dividends.

DEBT INSTRUMENT

What is a ‘Debt Instrument’?

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Debt instrument represents a contract whereby one party lends money to another on pre-

determined terms with regards to rate and periodicity of interest, repayment of principal

amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is

used for debt instruments issued by the Central and State governments and public sector

organizations and the term ‘debenture’ is used for instruments issued by private corporate

What are the features of debt instruments?

Each debt instrument has three features: Maturity, coupon and principal.

Maturity:

Maturity of a bond refers to the date, on which the Bond matures, which is the date on

which the borrower has agreed to repay the principal. Term-to-Maturity refers to the number

of years remaining for the bond to mature. The Term-to-Maturity changes everyday, from

date of issue of the bond until its maturity. The term to maturity of a bond can be calculated

on any date, as the distance between such a date and the date of maturity. It is also called the

term or the tenure of the bond.

Coupon:

Coupon refers to the periodic interest payments that are made by the borrower (who is also

the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at

which interest is paid, and is usually represented as a percentage of the par value of a bond.

Principal:

Principal is the amount that has been borrowed, and is also called the par value or face value

of the bond. The coupon is the product of the principal and the coupon rate. The name of the

bond itself conveys the key features of a bond. For example, GS CG2008 11.40% bond

refers to a Central Government bond maturing in the year 2008 and paying a coupon of

11.40%. Since Central Government bonds have a face value of Rs.100 and normally pay

coupon semi-annually, this bond will pay Rs. 5.70 as six- monthly coupon, until maturity.

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What is meant by ‘Interest’ payable by a debenture or a bond?

Interest is the amount paid by the borrower (the company) to the lender (the debenture-

holder) for borrowing the amount for a specific period of time. The interest may be paid

annual, semi-annually, quarterly or monthly and is paid usually on the face value (the value

printed on the bond certificate) of the bond.

What are the Segments in the Debt Market in India?

There are three main segments in the debt markets in India,

viz.,

(1) Government Securities,

(2) Public Sector Units (PSU) bonds, and

(3) Corporate securities.

The market for Government Securities comprises the Centre, State and State-sponsored

securities. In the recent past, local bodies such as municipalities have also begun to tap the

debt markets for funds. Some of the PSU bonds are tax free, while most bonds including

government securities are not tax-free. Corporate bond markets comprise of commercial

paper and bonds. These bonds typically are structured to suit the requirements of investors

and the issuing corporate, and include a variety of tailor- made features with respect to

interest payments and redemption.

Who are the Participants in the Debt Market?

Given the large size of the trades, Debt market is predominantly a wholesale market, with

dominant institutional investor participation. The investors in the debt markets are mainly

banks, financial institutions, mutual funds, provident funds, insurance companies and

corporates.

How can one acquire securities in the debt market?

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You may subscribe to issues made by the government corporates in the primary market.

Alternatively ,you may purchase the same from the secondary market through the stock

exchanges.

DERIVATIVEWhat is a Derivative?

Derivative is a product whose value is derived from the value of one or more basic variables,

called underlying. The underlying asset can be equity, index, foreign exchange (forex),

commodity or any other asset. Derivative products initially emerged as hedging devices

against fluctuations in commodity prices and commodity-linked derivatives remained the

sole form such products for almost three hundred years. The financial derivatives came into

spotlight in post-1970 period due to growing instability in the financial markets. However,

since their emergence, these products have become very popular and by 1990s, they

accounted for about two thirds of total transactions in derivative products.

What are Types of Derivatives?Forwards :

A forward contract is a customized contract between two entities, where settlement takes

place on a specific date in the future at today’s pre-agreed price.

Futures :

A futures contract is an agreement between two parties to buy Or sell an asset at a certain

time in the future at a certain price.

Options :

An Option is a contract which gives the right, but not an obligation, to buy or sell the

underlying at a stated date and at a stated price.

Options are of two types - Calls and Puts options:

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‘ Calls’ give the buyer the right but not the obligation to buy a given quantity of the

underlying asset, at a given price on or before a given future date.

‘ Puts ’ give the buyer the right, but not the obligation to sell a Given quantity of underlying

asset at a given price on or before a given future date. Presently, at NSE futures and options

are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks.

Warrants:

Options generally have lives of up to one year. The majority of options traded on exchanges

have maximum maturity of nine months. Longer dated options are called Warrants and are

generally traded over-the counter.

What is an ‘Option Premium’?

At the time of buying an option contract, the buyer has to pay premium. The premium is the

price for acquiring the right to buy or sell. It is price paid by the option buyer to the option

seller for acquiring the right to buy or sell. Option premiums are always paid upfront.

What is ‘Commodity Exchange’?

A Commodity Exchange is an association, or a company of any other body corporate

organizing futures trading in commodities. In a wider sense, it is taken to include any

organized market place where trade is routed through one mechanism, allowing effective

competition among buyers and among sellers – this would include auction-type exchanges,

but not wholesale markets, where trade islocalized, but effectively takes place through many

non-related individual transactions between different permutations of buyers and sellers.

What is meant by ‘Commodity’?

FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of movable

property other than actionable claims, money and securities”. Futures’ trading is organized in

such goods or commodities as are permitted by the Central Government. At present, all

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goods and products of agricultural (including plantation), mineral and fossil origin are

allowed for futures trading under the auspices of the commodity exchanges recognized under

the FCRA.

What is Commodity derivatives market?

Commodity derivatives market trade contracts for which the Underlying asset is commodity.

It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious

metals like gold, silver, etc.

What is the difference between Commodity and Financial derivatives?

The basic concept of a derivative contract remains the same whether the underlying happens

to be a commodity or a financial asset. However there are some features which are very

peculiar to commodity derivative markets. In the case of financial derivatives, most of these

contracts are cash settled. Even in the case of physical settlement, financial assets are not

bulky and do not need special facility for storage. Due to the bulky nature of the underlying

assets, physical settlement in commodity derivatives creates the need for warehousing.

Similarly, the concept of varying quality of asset does not really exist as far as financial

under lying are concerned. However in the case of commodities, the quality of the asset

underlying a contract can vary at times.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of

India) that pools money from individuals/corporate investors and invests the same in a

variety of different financial instruments or securities such as equity shares, Government

securities, Bonds, debentures etc. Mutual funds can thus be considered as financial

intermediaries in the investment business that collect funds from the public and invest on

behalf of the investors. Mutual funds issue units to the investors. The appreciation of the

portfolio or securities in which the mutual fund has invested the money leads to an

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appreciation in the value of the units held by investors. The investment objectives outlined

by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment

objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in

various asset classes like equity, bonds, debentures, commercial paper and government

securities.

SECURITIES

What is meant by ‘Securities’?

The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956,

includes instruments such as shares, bonds, scrip’s, stocks or other marketable securities of

similar nature in or of any incorporate company or body corporate, government securities,

derivatives of securities, units of collective investment scheme, interest and rights in

securities, security receipt or any other instruments so declared by the Central Government.

INDEXWhat is an Index?

An Index shows how a specified portfolio of share prices are moving in order to give an

indication of market trends. It is a basket of securities and the average price movement of the

basket of securities indicates the index movement, whether upwards or downwards. An index

is a number used to represent the changes in a set of values between a base time period and

another time period. A stock index is a number that helps measure the levels of the market.

Return on the index are expected to represent return that an investor can get if he has the

portfolio representing the entire market .various indices are computed for use by the

investors. Market indices have always been of great important in the world of security

analysis and portfolio management. People from all walks of life are affected by market

indexes. Economists, technicians and statisticians use stock marker indexes to study long

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term growth patterns on the economy, to forecast business cycle patterns Investors use the

market index as a bench mark against which to evaluate the performance of the it own or

institutional portfolios. Technical analysts, base their decision to buy and sell on tha pattern

that appears in tha time series of the market indexes. Market indexes are also used as

economics indicators. The various indexes that are complied in the Indian markets

are:

A) BSE Sensitive Index :

The Bombay stock exchange had started its own price index since 1986. Called the BSE

Sensitive Index. It consists of 30 scrips which actively traded. Many of which are in Group

A (specified shares) and a few in Group B (non-specified). It represents all the major

industries quoted on the exchange and has a base-year 1978-79.

B) BSE National index:

The BSE National Index was started by the Bombay Stock Exchange in 1988-89 with the

base year 1983-84. This series consists of 100 scrips belonging to NSE sensitive series.

These 100 scrips are chosen from all industrial group which represent the listing on all major

exchanges The method of complication is similar to that of BSE sensitive Index.

C) BSE 200 ARE Dollex:

Two other indexes are complied by BSE since 1993. With base year 1989-90. Both include

activity traded scrips. BSE 200 is in rupee terms while the Dollex is in dollar terms.

D) S & P CNX Nifty:

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It is a well diversified 50 stock index accounting for 25 sectors of the economy. It has 1995

as the base year. Unlike other indices, the base value is fixed at 1000.

E) RBI Index:

The RBI complied security indices form 1949 onwards. These were classified under the

following heads:

1 Govt. and semi-Govt. securities

2 Debentures of companies.

3 Equity shares of companies

DEMAT ACCOUNT

What's a demat account?

Demat refers to a dematerialized account. Just as you have to open an account with a bank if

you want to save your money, make cheque payments etc, you need to open a demat account

if you want to buy or sell stocks. So it is just like a bank account where actual money is

replaced by shares. You have to approach the DPs (remember, they are like bank branches),

to open your demat account. Let's say your portfolio of shares looks like this: 40 of Infosys,

25 of Wipro, 45 of HLL and 100 of ACC. All these will show in your demat account. So you

don't have to possess any physical certificates showing that you own these shares. They are

all held electronically in your account. As you buy and sell the shares, they are adjusted in

your account.

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What is Dematerialization?

Dematerialization is the process by which physical certificates of an investor are converted

to an equivalent number of securities in electronic form and credited to the investor’s

account with his Depository Participant (DP).

DEPOSITORYWhat is a Depository?

A depository is like a bank wherein the deposits are securities (viz. shares, debentures,

bonds, government securities, units etc.) in electronic form. A depository is an organization

where the securities of a shareholder are held in the electronic from though the medium of a

depository participant The function of a depository are similar to that of a bank. If an

investor desires to utilize the services of a depository the investor has to open an account

with the depository through a depository participant. A Depository participant is the

reprehensive (agent) in the depository system. The D.P will maintain the securities account

balances and intimate to the Holder about their holdings form time to time. SEBI has

permitted banks, financial institutions, custodies, stock brokers, etc, to become participants

in the depository. The main objective of a depository is to minimize the paper works

involved with the ownership, trading and transfer of securities. If an investor intends to get

back his securities in the physical form he can do so by requesting the Depository

participant. This is known as “Dematerialization”.

What's the difference between a depository and a depository participant?

A depository is a place where the stocks of investors are held in electronic form. The

depository has agents who are called depository participants (DPs). Think of it like a bank.

The head office where all the technology rests and details of all accounts held is like the

depository. And the DPs are the branches that cater to individuals. There are only two

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depositories in India -- the National Securities Depository Ltd (NSDL) and the Central

Depository Services Ltd (CDSL). There are over a 100 DPs.

Is a demat account a must?

Nowadays, practically all trades have to be settled in dematerialized form. Although the

market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of

up to 500 shares to be settled in physical form, nobody wants physical shares any more. So a

demat account is a must for trading and investing. Most banks are also DP participants, as

are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are. A

broker is separate from a DP. A broker is a member of the stock exchange, who buys and

sells shares on his behalf and on behalf of his clients.

Where do I begin?

Look for a DP to have an account with Most banks are also DP participants, as are

many brokers. You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are.

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and

sells shares on his behalf and on behalf of his clients. A DP will just give you an account to

hold those shares. You do not have to take the same DP that your broker takes. You can

choose your own. But many brokers offer special incentives in the form of lower charges for

opening demat accounts with their DPs.

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Get your documents in place

Once you approach your DP, you will be guided through the formalities of opening an

account. You must fill up an account opening form and sign an agreement with your DP.

The DP will ask for some documents as proof of your identity and address. Check with them

what they require. For instance, some may accept a driver's license, others may not. Here is a

broad list (you won't need all of them though)

� PAN card

� Voter's ID

� Passport

� Ration card

� Driver's license

� Photo credit card

� Employee ID card

� Bank attestation

� IT returns

� Electricity/ Landline phone bill

While they only ask for photocopies of the documents, they will need the originals for

verification. You will have to submit a passport size photograph on which you sign across.

How many shares you need to have to open an account When opening an account

with a bank, you need a minimum balance.

Not so with a demat account. A demat account can be opened with no balance of shares. And

there is no minimum balance to be maintained either. You can have a zero balance in your

account.

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What will it cost? The charges for account opening, annual account maintenance

fees and transaction charges vary between DPs. To get a comparative idea, visit the

websites of NSDL and CDSL.

Can I nominate? Sure. You can nominate whoever you like by filling up the

nomination details in the account opening form. This is to enable the nominee to

receive the securities after the death of the holder of the demat account.

STOCK MARKET

A stock market is a private or public market for the trading of company stock and derivatives

of company stock at an agreed price; both of these are securities listed on a stock exchange

as well as those only traded privately.

Stock market is also referred to as the Corporate Debt or Capital Market. While the money

market, which deals with short-term financial needs of business and industry, is restricted to

funds needed for a period of one year or less, instruments of the debt/capital markets are

raised for medium or long term needs. Indian Stock Market consists of three distinct

segments:

1. The Public Debt Market i.e. the market for Government securities, (also called Gilt-

edged Market). These are interest bearing and dated securities. This market is

regulated by RBI, the Central Bank and Banker to the Government.

2. PSU Bonds Market i.e. Bonds floated by public Sector units, Nationalized banks and

financial Institutions for raising Tier-II capital and also debentures floated by

Corporates. This is represented as the Corporate Debt Market.

3. The Equity Market for raising of equity or preference share capital by all corporates.

Money invested in company shares is not refundable, but if the shares are listed in a

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stock exchange these can be sold or purchased, thus providing liquidity to such

investments. Shares do not carry interest, but shareholders can participate in sharing

the profits of the corporate body declared by way of Dividends, bonus shares etc.

While the hope of receiving attractive dividends motivates the public to subscribe to

the share capital, declaring dividend is not a legal obligation on the part of the

Companies, and hence not a right on the part of the shareholders. But shareholders

enjoy various other rights as conferred by the Indian Companies Act, 1956. Indian

Public companies generally follow the objective of increasing shareholders wealth as

the prime goal of financial management

At this context it is relevant to mention about two categories of stock market, i.e.

Primary Market covering new public issues of all categories of securities, including

G-sec, bonds and equity/preference capital.

Secondary market, which deals with already issued securities of all types.

Transactions of the secondary market are carried out through one of the authorized

stocks exchanges, where the traded security is listed.

The expression 'stock market' refers to the system that enables the trading of company stocks

(collective shares), other securities, and derivatives. Bonds are still traditionally traded in an

informal, over-the-counter market known as the bond market. Commodities are traded in

commodities markets, and derivatives are traded in a variety of markets

Trading

Participants in the stock market range from small individual stock investors to large hedge

fund traders, who can be based anywhere. Their orders usually end up with a professional at

a stock exchange, who executes the order.Some exchanges are physical locations where

transactions are carried out on a trading floor, by a method known as open outcry. This type

of auction is used in stock exchanges and commodity exchanges where traders may enter

"verbal" bids However, buyers and sellers are electronically matched. One or more

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NASDAQ market makers will always provide a bid and ask price at which they will always

purchase or sell 'their' stock. The Paris Bourse, now part of Euronext, is an order-driven,

electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted

of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart.

In 1986, the CATS trading system was introduced, and the order matching process was fully

automated.From time to time, active trading (especially in large blocks of securities) have

moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs

Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away

from the exchanges to their internal systems. That share probably will increase to 18 percent

by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and

sellers of securities themselves, according to data compiled by Boston-based Aite Group

LLC, a brokerage-industry consultant

Market participants

Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy

businessmen, with long family histories (and emotional ties) to particular corporations. Over

time, markets have become more "institutionalized"; buyers and sellers are largely

institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor

groups, and banks). The rise of the institutional investor has brought with it some

improvements in market operations. Thus, the government was responsible for "fixed" (and

exorbitant) fees being markedly reduced for the 'small' investor.

Capital Market in India

This is the market consisting of large number of individual investors, household savers,

professionals, and agriculturists, who are able to a preserve, a part of their current earnings to

invest in securities. They form the class of capital providers. On the other side the corporate

bodies engaged in Industry, trade and other business ventures are the productive users of

very large amount of capital. It is the capital market that transforms the savings of large

23

number of individuals to productive channel to meet the demands of capital for Industry,

trade and business. The financial/security market intermediaries serve as the link between

capital providers and capital seekers.

The individual savers are not organised. They can invest if they could secure the trust and

confidence that the funds invested would be prudently employed and they could confidently

expect to get a fair return/reward on their hard-earned savings. This is the function of

organised capital market to regulate market forces to ensure fair dealings, to motivate

savings on the part of the investors and to secure smooth flow of savings/capital from

investors to capital seekers for productive needs. This supervisory and regulatory function is

performed by SEBI, the market regulator and market developer

The capital market consists of the following components:

The scattered investors, who are regular savers and the purveyors of capital needed by

business and industry. Inter-se they are not organised.

The Corporate and Business houses who are the users or seekers of this capital, who

are mutually better organised.

The Financial Intermediaries who link the investors and the capital seekers/users, who

are professionals.

SEBI, the market developer and market regulator (the apex organization).

The Corporate Sector draws its capital requirements from the following sources:

Promoters Contribution;

Equity Capital raised from the shareholders (generally referred to as equity capital);

Preference share capital raised from the shareholders

Bonds/Debentures raised from the Public (generally referred to as Debt Capital);

24

Term Loans from Banks & Financial Institutions;

Short-term Working Capital from Banks;

Unsecured Loans & Deposits; and

Internal generation of Funds (Profits/surpluses reproached and held as Reserves).

Stock market is also referred to as the Corporate Debt or Capital Market. While the money

market, which deals with short-term financial needs of business and industry is restricted to

funds needed for a period of one year or less, instruments of the debt/capital markets are

raised for medium or long term needs. Indian Stock Market consists of three distinct

segments:

The Public Debt Market i.e. the market for Government securities (also called Gilt-

edged Market). These are interest bearing and dated securities. This market is

regulated by RBI, the Central Bank of the country and banker to the Government.

PSU Bonds Market i.e. Bonds floated by public Sector units, nationalized banks and

financial Institutions for raising Tier-II capital and also debentures floated by

corporates. This is represented as the Corporate Debt Market.

The Equity Market for raising of equity or preference share capital by all corporates.

Money invested in company shares is not refundable, but if the shares are listed in a

stock exchange these can be sold or purchased, thus providing liquidity to such

investments. Shares do not carry interest, but shareholders can participate in sharing

the profits of the corporate body declared by way of dividends, bonus shares etc.

While the hope of receiving attractive dividends motivates the public to subscribe to

the share capital, declaring dividend is not a legal obligation on the part of the

companies, and hence not a right on the part of the shareholders. But shareholders

enjoy various other rights as conferred by the Indian Companies Act, 1956. Indian

25

Public companies generally follow the objective of increasing shareholders wealth as

the prime goal of financial management.

At this context it is relevant to mention about two categories of stock market, i.e.

Primary market covering new public issues of all categories of securities, including

G-sec, bonds and equity/preference capital.

Secondary market, which deals with already issued securities of all types.

Transactions of the secondary market are carried out through one of the authorized

stock exchanges, where the traded security is listed.

Functions of the Capital Market

The organised and regulated capital market motivates individual to save and invest

funds. The availability of safe and profitable sources of investment is an essential

criterion to create propensity to save and invest on the part of the earning public;

It provides for the investors a safe and productive channel for investment of savings

and secures the recurring benefit of return thereon, as long as the savings are retained;

t provides liquidity to the savings of the investors, by developing a secondary capital

market, and thus makes even short term savings, consistently available for long-term

users;

It thus mobilizes savings of large number of individuals, families and associations and

makes the same available for meeting the large capital needs of organised industry,

trade and business and for progress and development of the country as a whole and its

economy.

To discharge these functions, the organised capital market accepts a dual responsibility

To develop the market and to promote savings & investment;

26

To regulate the players in the market vis-a-vis the investor and to enforce market

discipline, through market regulators and registered intermediaries. Such that the

unorganised small man is able to deal safely and conveniently through these

regulatory bodies and the intermediaries, and need not

necessarily has to come into direct contact with the ultimate seekers of his savings.

To understand the regulatory and control systems in-built in the market, we must study the

structural framework of the capital market. The capital market consists of the following

segments.

The Primary Stock Market

It is also called the market for public issues. This market refers to the raising of new capital

(equity or debt i.e. equity shares, preference shares, debentures or Rights Issues) by

corporates. Newly floated companies or existing companies may tap the equity market by

offering public issues. When equity shares are exclusively offered to the existing

shareholders, it is called "Rights Issue". When a Company after incorporation initially

approaches the public for the first time for subscription of its public issue it is called Initial

Public Officer (IPO). Successful floating of a new issue requires careful planning, timing of

the issue and comprehensive marketing efforts. The services of specialized institutions, like

underwriters, merchant bankers and registrars to the issue are available for the corporate

body to handle this specialized job. Underwriters are financial institutions, which undertake

to secure a committed quantum of equity/debt subscribed by the public, failing which they

accept these shares/bonds as their own investment. It is referred to as the issue or that part of

getting devolved on the underwriters. The transactions relating to the primary market i.e.

public/rights issues are not carried out through stock exchanges. However there is effective

regulation of SEBI at every stage of a public issue. This is done through merchant bankers,

underwriters and registrars to the issue each acting at different points. Subscriptions to the

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new issue are collected at specific branches of one or more collecting banks prescribed span

of time, represented by the dates of opening of the issue and closing of the issue.

Initial public offering (IPO) ,

also referred to simply as a "public offering," is the first sale of stock by a private company

to the public. IPOs are often issued by smaller, younger companies seeking capital to

expand, but can also be done by large privately-owned companies looking to become

publicly traded.

In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it

determine what type of security to issue (common or preferred), best offering price and time

to bring it to market. IPO’s can be a risky investment. For the individual investor, it is tough

to predict what the stock will do on its initial day of trading and in the near future since there

is often little historical data with which to analyze the company. Also, most IPOs are of

companies going through a transitory growth period, and they are therefore subject to

additional uncertainty regarding their future value.

Reasons for listing

When a company lists its shares on a public exchange, it will almost invariably look to issue

additional new shares in order to raise extra capital at the same time. The money paid by

investors for the newly-issued shares goes directly to the company (in contrast to a later trade

of shares on the exchange, where the money passes between investors). An IPO, therefore,

allows a company to tap a wide pool of stock market investors to provide it with large

volumes of capital for future growth. The company is never required to repay the capital, but

instead the new shareholders have a right to future profits distributed by the company.

The existing shareholders will see their shareholdings diluted as a proportion of the

company's shares. However, they hope that the capital investment will make their

shareholdings more valuable in absolute terms. In addition, once a company is listed, it will

be able to issue further shares via a rights issue, thereby again providing itself with capital

for expansion without incurring any debt. This regular ability to raise large amounts of

28

capital from the general market, rather than having to seek and negotiate with individual

investors, is a key incentive for many companies seeking to list.

Procedure

IPO’s generally involve one or more investment banks as "underwriters." The company

offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its

shares to the public. The underwriter then approaches investors with offers to sell these

shares.

The sale (that is, the allocation and pricing) of shares in an IPO may take several forms.

Common methods include:

Dutch auction

Firm commitment

Best efforts

Bought deal

Self Distribution of Stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more

major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a

commission based on a percentage of the value of the shares sold. Usually, the lead

underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest

commissions—up to 8% in some cases.

Multinational IPO’s may have as many as three syndicates to deal with differing legal

requirements in both the issuer's domestic market and other regions. For example, an issuer

based in the E.U. may be represented by the main selling syndicate in its domestic market,

Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia.

Usually, the lead underwriter in the main selling group is also the lead bank in the other

selling groups. Usually, the offering will include the issuance of new shares, intended to

raise new capital, as well the secondary sale of existing shares. However, certain regulatory

29

restrictions and restrictions imposed by the lead underwriter are often placed on the sale of

existing shares.

Public offerings are primarily sold to institutional investors, but some shares are also

allocated to the underwriters' retail investors. A broker selling shares of a public offering to

his clients is paid through a sales credit instead of a commission. The client pays no

commission to purchase the shares of a public offering, the purchase price simply includes

the built-in sales credit. The issuer usually allows the underwriters an option to increase the

size of the offering by up to 15% under certain circumstance known as the green shoe or

over allotment option.

Auction

A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce

the inefficient process. He devised a way to issue shares through a Dutch auction as an

attempt to minimize the extreme under pricing that underwriters were nurturing.

Underwriters, however, have not taken to this strategy very well. Though not the first

company to use Dutch auction, Google is one established company that went public through

the use of auction. Google's share price rose 17% in its first day of trading despite the auction

method. Perception of IPO’s can be controversial. For those who view a successful IPO to be

one that raises as much money as possible, the IPO was a total failure. For those who view a

successful IPO from the kind of investors that eventually gained from the under pricing, the

IPO was a complete success.

Pricing

Historically, IPOs both globally and in the US have been under priced. The effect of Under

pricing an IPO is to generate additional interest in the stock when it first becomes Publicly

traded. This can lead to significant gains for investors who have been allocated shares of the

IPO at the offering price. However, under pricing an IPO results in "money left on the

table"—lost capital that could have been raised for the company had the stock been offered

at a higher price. The danger of overpricing is also an important consideration. If a stock is

30

offered to the public at a higher price than what the market will pay, the underwriters may

have trouble meeting their commitments to sell shares. Even if they sell all of the issued

shares, if the stock falls in value on the first day of trading, it may lose its marketability and

hence even more of its value. Investment banks, therefore, take many factors into

consideration when pricing an IPO, and attempt to reach an offering price that is low enough

to stimulate interest in the stock, but high enough to raise an adequate amount of capital for

the company. The process of determining an optimal price usually involves the underwriters

("syndicate") arranging share purchase commitments from lead institutional investors.

How is the issue price decided on?

A company that is planning an IPO appoints lead managers to help it decide on an

appropriate price at which the shares should be issued. There are two ways in which the price

of an IPO can be determined: either the company, with the help of its lead managers, fixes a

price or the price is arrived at through the process of book building.

Note : Not all IPO’s are eligible for delivery settlement through the DTC system, which

would then either require the physical delivery of the stock certificates to the clearing agent

bank's custodian, or a delivery versus payment ("DVP") arrangement with the selling group

brokerage firm. This information is not sufficient.

Secondary Stock Market

The Secondary Market deals with the sale/purchase of already issued equity/debts by the

corporates and others. The sale/purchase of these securities are carried out at the specific

Stock Exchange(s), where the companies get their public issues listed for trading. The main

function of the secondary market is to provide liquidity to the listed securities by enabling a

holder to easily convert the securities into cash through the stock exchanges. An individual

or an Institution can either hold a portfolio of securities as a permanent investment, or he can

hold a basket of securities for short-periods and engage in buying and selling them to gain

from market fluctuations. The secondary market also acts as an important indicator of the

31

investment climate in the economy. When prices of existing securities are rising and there is

large trading in the existing shares, such a boom in the secondary market correspondingly

signifies that new issues if floated at that point of time would be successfully subscribed.

Investors : On the one hand are the innumerable and not organised savers.

Capital Seekers : At the other end are those seeking capital from the capital market;

Regulatory Body : SEBI (the Securities & Exchange Board of India) an autonomous

and statutory body acts as the market regulator and market developer. It regulates and

controls the capital users and all functionaries between the users and the investors.

The Stock Exchanges : There are 23 Stock Exchanges registered with SEBI and under its

regulation. They provide a transparent and safe (risk-free) forum of a market for

investors to transact and invest their funds.

The Depositories : The depositories are innovative institutions, who are able to render

the market paperless by holdings securities electronically, providing ease and speed

for those transacting in the market.

The Registered Intermediaries : They consist of brokers, sub-brokers, trading and

clearing members, portfolio managers, bankers to issue, merchant bankers, registrars,

underwriters and credit rating agencies. They all provide a basket of services to the

investors to lesson risk and make transacting easier and smooth. They are all

registered with SEBI and act under the regulation of SEBI abiding by the Code of

Conduct prescribed for each of them governing their respective roles.

So vast and well established is the market that the daily turn over in the main Stock

Exchange in the Country National Stock Exchange of India averages Rs.10000 Crore

presently (in the equities segment alone) and bound to multiply further in the coming future.

The maximum brokerage that a NSE trading member/registered sub-broker can charge as per

SEBI Stipulations.

32

1. As stipulated by SEBI, the maximum brokerage that can be charged is 2.5% of the

trade value. This maximum brokerage is inclusive of the brokerage charged by the

sub-broker (sub-brokerage cannot exceed 1.5% of the trade value). However the

trading member can charge additionally-

2. Service Tax @ 5% of the brokerage.

3. Transaction Charge levied by NSE.

4. Penalties rising on behalf of client (investor).

5. The brokerage and service tax is indicated separately in the contract note.

Procedure for Buying & Selling

If a client desires to buy or sell shares & securities, he has to transact in the secondary

market i.e. through the stock exchange. He cannot do so directly, but has to deal through a

broker recognized by SEBI He has to enlist the service of a SEBI registered trading member

or SEBI registered sub-broker of a trading member of a registered Stock Exchange. Different

stock exchanges have different bylaws though they all exhibit common safeguards and

precautions. In our study we restrict to overview the system adopted in National Stock

Exchange (NSE) and The Stock Exchange Mumbai (BSE) the leading stock exchanges of

India, which together cover over 75% of the transactions.

After approaching the broker/sub-broker of NSC/BSE to ensure verification of bonafide

membership investor may ask the broker/sub-broker to furnish documents such as SEBI

registration certificate, Registration with NSE/BSE etc to verify the antecedents of the

person. He can also approach the exchange to counter check whether the person holds the

valid registration. When a client instructs his broker to enter into a transaction, he may ask

him to buy or sell at the best price and leave the matter to broker's judgment or he may

specify reasonable price limits. For instance, The client may specify " Buy at 110 max." In

such a case, The broker may not be able to execute the order even though the quotations of

33

the day would be "Rs110, 111,112,113" as jobber's spread of say Rs.2 would make the share

available for purchase at a price not lower than Rs. 112.

Procedure for Dealing through a Stock Exchange

We have seen that a client deciding to operate through an exchange, has to avail the services

of a SEBI registered broker/sub-broker. He has to enter into a broker-client agreement

client, his broker is supposed to give him a contract note having details of the transaction as

directed by the client. Since the contract note is a legally enforceable document, the client

should insist on receiving it. The client has the obligation to deliver the shares in case of sale

or pay the money in case of purchase within the time prescribed. If he has opted for

transaction in physical mode, in case of bad delivery of securities by him, he has the

responsibility to rectify them or replace them with good ones.

For Securities in Physical Mode - How Does Transfer of Securities Take Place?

To effect a transfer in the physical mode the securities should be sent to the company along

with a valid, duly executed and stamped transfer deed duly signed by or on behalf of the

transferor (seller) and transferee (buyer). It would be a good idea to retain photocopies of the

securities and the transfer deed(s) when they are sent to the company for transfer. It is

essential that the client sends them by registered post with acknowledgement due and

watches out for the receipt of the acknowledgement card. If he does not receive the

confirmation of receipt within a reasonable period, he should immediately approach the

postal authorities for confirmation. Sometimes, for his own convenience, the client (while

buying securities) may choose not to transfer the securities immediately.

Procedure to be Followed for Transfer of Securities

34

On receipt of the client's request for transfer, the company proceeds to transfer the securities

as per provisions of the law. In case they cannot affect the transfer, the company returns back

the securities giving details of the grounds under which the transfer could not be effected.

This is known as Company Objection.

CHAPTER-3

INDUSTRY PROFILE

INDIAN CAPITAL MARKET

Capital market is the market for long — term funds. Just as the money market is the market

for short-term funds. It refers to all the facilities and the institutional arrangements for

borrowing and lending term funds (medium-term and long term funds). It does not deal in

capital goods but is concerned for long-term money capital comes predominantly from

private sector manufacturing industries and agriculture sector and from the government for

the purpose of economic development.

CONSTITUENTS OF INDIAN CAPITAL MARKET

35

The Indian capital market is divided into gilt-edged market and the industrial securities

market. The gilt-edged market refers to the market for government and semi-government

securities, backed by RBI, The securities traded in this market are stable in value and are

much sought after by bank and other institutions. The industrial securities market refers to

the market of shares and debentures of old and new companies. The industrial market is

further dividend into the new issue market and the old capital market i.e., the Stock

Exchange.

The new issue market refers to rising of new capitals in the form of shares and debentures.

Where as stock exchanges deal with securities already issued by companies. Both markets

are equally important hut often the new issue market is much more important from point of

view of economic growth. However, the functioning of the new issue market will he

facilitated only when there are abundant facilities of transfer of existing securities. The

capital market is also classified into primary capital market and secondary Capital market.

The primary market refers to new issue market which relates to the issue of shares,

preferences share and debentures of non-government public limited companies, and also the

raising of fresh capital by government companies and the issue of public sector.

HISTORICAL BACKGROUND

The stock market provides a market place for the purchase and sale of securities evidencing

the ownership of business debt. Stock Exchanges are the most perfect type of market

securities whether of Government or Semi-Government bodies or other public bodies as also

for shares and debentures issued by the joint stock companies.

CAPITAL MARKET

Primary Market (New Issue Market):

36

This method includes the data collected from the personal discussions with the authorized

clerks and members of the Exchange. The primary market provide channel for sale of new

securities primary market provide opportunity to issue of securities .

Secondary Market:

The secondary collection method includes the lectures of the superintend of the Department

of Market Operations, EDP etc, and also the data collected from the News, Magazines of the

NSE, HSE and different books issue of this study.

STOCK MARKETS OF INDIA

The origin of the stock market commences from the last quarter of 18th century when long

term securities representing property or promises to pay were first issued and made

transferable. The real beginning occurred in the middle of the 1 9th century after the

enactment of the company’s act 1850 which introduced the feature of limited liability and

generated investor’s interest in corporate sector. From 1850 to 1865 there was arise of power

of the brokers. The broking business proved to be profitable. This has lead to the increase in

number of brokers to 60. An important event in the development of stock market in India

was the formation of Native share and Stock brokers association in Bombay in 1875. this

was the followed by the formation of associations in Ahmedabad (1894), Calcutta (1908) and

Madras (1937).

REGULATION

same time they are under the supervision and control of government. On 26th January 1950

the constitution o9f India came into force and under item 4 or the union list, stock exchange

became exclusively a central subject. In the following year a draft bill for stock exchange

regulation was prepared and referred to an expert committee under the chairmanship of Sri

Goranwala. The stock exchanges are regulated by securities (contract) regulation act

1956.And securities contract rules 1957. The securities contracts (regulation) act 1956

37

permits only those stock exchanges which are recognized by the central government to

function in any notified area or state. The recognized stock exchange is thus placed in a

privileged position .

STOCK EXCHANGES

At present there are 27 stock exchanges recognized under the securities contracts

(Regulation) act 1956. They are located at Ahmedahad, Bangalore, Bhuhhneshwar, Mumbai,

Calcutta, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kunpur,

Ludhiana, Mangalore, Meerut, Patna and Rajkot in addition to the above stock exchanges,

screen based exchanges like National Stock Exchange Of India, OTCET are also set up. The

recognized stock exchanges mobilize and direct the flow of savings of general public into

productive channels of investment. The Hyderabad Stock Exchange (HSE) was the sixth

stock exchange recognized under the securities contract (Regulation)

STOCK EXCHANGES

CITY YEAR OF ESTABLISHMENT

TYPE OF ORGANIZATION

YEAR OF RECOGNITION

Bombay 1875

Voluntary non profit making Association

1957

Calcutta 1908 Public limited company 1980

Madras 1937 Company limited by guarantee

1982

38

Ahmedabad 1894

Voluntary non profit making Association

1982

Delhi 1947 Public limited company 1982

Hyderabad 1943Company limited by guarantee

1983

SECONDARY MARKET

The segment of secondary market is a place where script are traded to provide liquidity to

scripts which were issued in the primary market. Thus the growth of the secondary market is

very much dependant upon the primary market. The more the number of companies enters

the primary market the greater is the volume trade at the secondary market. The trading

activities in the secondary market is done through the recognized stock exchange i.e. ICSE

(inter connected stock exchange of India) is yet to make its beginning shortly. Mainly the

secondary market operations involved in buying and selling of securities on the stock

exchange through its members the companies hitting the primary market are mandatory

including a regional stock exchange. The following intermediaries are involved in the

secondary market.

1. Members I broker of a stock exchange i.e., for buying and selling of scripts.

2. Portfolio Manager.

3. Investment Manager.

4. Transfer Agent.

SEBI has issued several guidelines and regulations on secondary market, conduct and

registration of brokers, portfolio managers. SEBI has taken several steps to control and

regulate the secondary market in India which includes expansion of stock

39

exchange centers and their integration, improvement in trading system and settlement

procedures. Registration of brokers, sub-brokers prohibition of insider trading, transparency

in trading activities, eligibility norms of membership, capital adequacy

norms, margins. Further mutual funds have also been brought under the purview of the SEBI

DEVELOPMENTS IN SECONDARY MARKET

1. SEBI has issued Capital Adequacy Norms for brokers consisting of base Minimum

Capital, Additional capital related to volume of business.

2. NSE was incorporated to compete with other stock exchanges which went fully automated

and available to a common investor by means of terminals spreading all over the country

3. Circuit Breakers system was introduced at Mumbai stock exchange and other exchanges to

stop trading in particular scrip fluctuating beyond 8% in some

scripts for the previous days closing prices.

4. OTCEI was permitted to trade in unlisted scripts, hut listed on Mumbai stock exchange

along with debentures.

5. Apart from this, Odd Lot trading sessions was separated to ensure trading in odd lots

conveniently. Brokers were advised to keep separate accounts for clients and not to touch the

funds of clientele sale realizations.

6. Forward trading was banned from 15th march 1994.

7. Capital gain Tax Rules were liberalized.

8. Compulsory Market Making concept was introduced.

9. Jumbo share concept of larger denomination share certificates was introduced with a view

to mitigate the problems of custodian of Indian and Foreign Financial Institutions.

10. The systems of corporate members were introduced in all exchanges and the Exemption

of capital gain was extended till 3l December 1998.

11. The Demit system was started i.e., trading the scripts in the dematerialized form for the

purpose of avoiding Bad deliveries, Delay in transfers, Reduction of transfer expenses,

Reducing settlement delays and reducing market lot share to 1.

40

12. Rolling settlement was introduced in some shares for the purpose of encouraging the

buying and selling shares only by the genuine buyers or investors and to avoid excess

speculation.

ROLE OF SEBI Securities and exchange Board of India was set up in 1988 and became a statutory

organization from January 1992. it was given a statutory status for healthy regulation of

capital markets. Office of Capital Issues (OCI) was abolished and the companies

were to approach market directly subject to SEBI guidelines relating to disclosures and other

measures of investors protection. This led to removal of hurdles i.e., getting permission from

CCI, MRTP commissioner, Company Law Board, Ministry of Finance, Industrial, Registrar

of companies etc.

The Securities and Exchange Board of India Act (SEBI) empowers SEBI to:

1. Regulate the business of stock exchanges.

2. Register and regulate intermediaries associated with the securities market as

well as working of mutual funds.

3. Promote and regulate self Regulatory organizations.

4. Prohibit fraudulent and unfair trade practices relating to securities transactions.

SEBI directed that all Stock Exchanges should computerize their operations to have better

transparency and. efficient screen based trading system and also permitted most of the stock

exchanges to have their additional trading floors at different places

through VSATS or WAN/LAN systems to suit their requirements. This has facilitated

members and investors to do their trading activities in a more and competitive way.

The system of insurance of brokers was made mandatory; the norms for bad deliveries were

standardized.

41

ONLINE TRADING

In India first fully automated stock exchange was formed in the year 1994 with fully

automated trading system called screen based trading or Online trading basing on computers

this system has brought revolutionary changes in the secondary markets in India. This system

is mainly helpful for the purpose of protecting the investors from the brokers in the price

rigging. The NSE has used the software called NEAT (National Exchange for Automated

Trading). After NSE starting the Online trading the India’s premier stock exchanges

followed the way of NSE and BSE.

Objectives of Online Trading:

Providing a Nation wide trading facility for all type of securities.

Ensuring equal access to investors to all over the country through communication

network.

Providing a fair, efficient and transparent securities market using an electronic trading

system.

Enabling the use of shorter settlement cycles and book entry settlement system.

OUTCRY SYSTEM

Trading on stock exchanges used to take place through open outcry without use of

technology for immediate matching or recording of trades. This was a time consuming and

inefficient system. The practice of physical trading imposed limits on trading volumes and

hence the slow speed with which new information was incorporated into price.

NSE is the first exchange in the world to use satellite communication technology for trading.

Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-

the-art client server based application. At the server end all trading information is stored in

42

an in memory database to achieve minimum response time and maximum system availability

for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is

uniform response time of less than one second.

DEMATERALISATION

The decade of Lhe9Os witnessed a revolution in the clearing and settlements functions in he

Indian securities market. Promulgation of the Depositories Ordinance in 1995 and

establishment in this revolution which sought to eliminate the ills associated with paper base

securities system such as delay in transfer, bad delivery, theft, fake and forged shares, and

synchronize the settlement of trade transfer of securities irrespective of geographical

locations.

Although in the first phase, SEB1 has made Demat trading for selected scripts, efforts should

be made to bring in all major exchanges within a well defined time frame for acceptance of

Demat Trading. With SEBI allowing Demat delivery even in the fiscal segment more and

more retail investor are likely to get in to the system which ultimately encourage more

brokers also to become to become depository participants and educate the retail investor. The

advantage of script less trading and the need for such Demat trading compulsorily could also

be explored. Apart from this the banking network in the country could be used for this

purpose by providing tow way quotes to take up this work.

Stock exchange:

A stock exchange or bourse is a corporation or mutual organization which provides the

facilities for stock brokers to trade company stocks and other securities. Stock exchanges

instruments and capital events including the payment of income and dividends.

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The securities traded on a stock exchange include shares issued by companies, unit trusts and

other pooled investment products as well as bonds. To be able to trade a security on a certain

stock exchange, it has to be listed there.

Usually there is a central location at lest for recordkeeping, but trade is less linked to such a

physical place, as modern markets are electronic networks, which gives the advantages of

speed and cost of transactions. Trade on an exchange is by members only; a stock broker is

said to have a seat on the exchange.

A stock exchange is often the most important component of a stock market. There is usually

no compulsion to issue stock via the stock exchange itself, nor must .

The initial offering of stocks and bonds to investors is by definition done in the primary

market and subsequent trading is done in the secondary market.

Increasingly all stock exchanges are part of a global market for securities, supply and

demand in stock markets is driven by various factors which, as in all free markets, affect the

price of stocks (see stock valuation).

HISTORY OF THE STOCK EXCHANGE

In 12th century France the curators de change were concerned with managing and regulating

the debts of agricultural Communities on behalf of the banks. As these men also traded in

debts. They could he called the first brokers.

Some stories suggest that the origins of the term “bourse” come from the Latin bursa

meaning a bag because, in 13e. Bruges, the sign of a purse hung on the front of the house

where mere chats met.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered

inside the house of a man called van deer Burse, and in 1309 they institutionalized this until

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now informal meeting and became the “Bruges Bourse”. The idea spread quickly around

Flanders and neighboring counties and “Bourse”.

In the middle of the 13th century Venetian bankers began to trade in government securities.

In 1351 the Venetian Government outlawed spreading rumors intended Intended to lower the

price of government funds. There were people in Pisa. Verona, Genoa and Florence who also

began trading in government securities during the 14th century. This was only possible

because these were independent city states not ruled by a duke but a council of influential

citizens. The Dutch later started joint stock companies, which let shareholders invest in

business ventures and get a share of their profits or losses. In 1602, the Dutch East India

Company issued the first shares on the Amsterdam Stock Exchange. It was the first company

to issue stocks and bonds.

Other types of exchange

In the 19th century, exchanges were opened to trade forward contracts on commodities.

Exchange traded forward contracts are called futures contracts. These commodity exchanges

later started offering future contracts on other products on other products. Such as interest

rates and shares, as well as options Contracts. They are now generally known as futures

exchanges.

This is a list of stock exchanges. Those futures exchanges that also offer trading in securities

besides trading in futures contracts are listed both here and the List of futures exchanges

LIST OF STOCK EXCHANGES IN WORLD

CONTENTS:

1. North America

2. Europe

3. Asia

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4. South America

5. Oceania

6. Africa

USA:

1. Archipelago Exchange, merged with NYSE

2. Arizona Stock Exchange, closed down

3. American Stock Exchange (AMEX)

4. Boston Stock Exchange

5. Chicago Stock Exchange

6. Hedge Steel

7. NASDAQ

8. National Stock Exchange

9. New York Stuck Exchange

10. Pacific Exchange (PCX)

11. Philadelphia Stock Exchange (PHLX)

INDIA: 1. Ahmedabad Stock Exchange

2. Bangalore Stock Exchange

3. Bhubaneswar Stock Exchange Association

4. Bombay Stock Exchange (B SE)

5. Calcutta Stock Exchange

6. Coimbatore Stock Exchange

7. Delhi Stock Exchange Association

8. Gauhati Stock Exchange

9. Hyderabad Stock Exchange

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10. Inter-connected Stock Exchange of India

11. Jaipur Stock Exchange

12. Ludhiana Stock Exchange Association

13. Madhya Pradesh Stock Exchange

14. Mangalore Stock Exchange

15. Mumbai Stock Exchange

16. National Stock Exchange of India (NSE)

17. 0TC Exchange of India

18. Pune Stock Exchange

19. Saurashira -Kutch Stock Exchange

HISTORY OF BSE

Indian has a long history of securities markets, which is largely driven by the Stock

Exchange, Mumbai. An indigenous enterprise set up about 130 year ago amidst

the backdrop of British supremacy in international finance: BSE has been the hallmark of

India’s initiative into high street finance more than a century ago.

As cheque red and exciting its more than a century of existence has been, equally swift and

smooth was the transformation of BSE into one of the most modern stock exchanges in the

Asian region. It has several firsts to its credit even in the intensely competitive environment.

BSE was first to introduce concepts such as free float indexing, obtain ISO certification for

surveillance, establish huge infrastructure to enhance knowledge .know-how, put in place a

trading platform that works on a sub second response time - and capacity of 4 million trades

a day, export of trading platform technology to other stock exchange in Middle east, report

highest delivery ratio among the major exchanges, lowest transaction costs, a record of

lowest defaults, offer highest compensation for investor in cases of valid and approved

claims. The origin of the Bombay (Mumbai) Stock Exchange dated back to 1875. it was

organized under the name of “the Native Stock and Share Brokers Association” as a

voluntary and non- profit making association. It as recognized on a permanent basis in 1957.

This premier stock exchange is the oldest stock exchange in Asia.

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NSE-50 INDEX (NIFTY)

This Index is built by India Services Product Ltd (IISL) and Credit Rating Information

Services of India Ltd (CRISIL). NSE-50 Index was introduced on April 22, 1996 to serve as

an appropriate index for the new segment of futures and options. “Nifty” means National

Index for Fifty Stocks. The selection criteria are the market capitalization and liquidity. The

market capitalization of the companies should be Rs. 5 billion or more. The company scrip

should be traded for 85% of the trading days at an impact cost less than 1.5%. The base

period for the Nifty index is the closing prices on November 31st1995.The base period

selected to commensurate the completion of one — year operation of NSE in the stock

market. The base value of index at 1000 with the base capital of Rs.2.06 of trillion.

The NSE Madcap Index or the Junior Nifty comprises 50 stocks that represents 21board

industry groups and will provide proper representation of the madcap segment of greater

than Rs.200 crors and should have traded 85% of trading days at an impact cost of less than

2.5%. The base period for the index is Nov 4, 1996. which signifies two years for completion

of operations of the capital market segment of the operations. The base value of the index

has been set at 1000.

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CHAPTER-6

SUGGESTIONS

49

1. Before buying the share it is essential that investor must shack the position of liquidity (all

‘A’ group shares has high liquidity). The source of information about liquidity can get from

the brokers

2. Avoid buying shares of the company with an equity capital less than Rs.1 cr.

3. Avoid buying the share 9f the company with the number of share holders less than 5000.

4. Avoid buying shares of the company which are traded infrequently.

5. Avoid buying shares of the company which are not traded on your stock exchange.

6. Investor must show interest in steady and fast growth shares only.

7. Avoid buying Turn rounds (making loss continuously), Cyclical (cycles of good and bad

performance), Dog shares (very inactive or passive).

8. Avoid companies with low PIE ratio relative to the market as always.

9. If the investor is confident of EPS moving up and expects PIE to increase as well stick to

the shares and be patients.

10. Another side of the analysis is that investor must also know the factors.

Is the market in a “good mood” or not at that time?

How will the market feel about the share?

CHAPTER-7

CONCLUSION

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Let me end by bringing in the beginning. It is globally recognized that the growth of the

economy depends to a large extent globally on the growth of the Securities Market as it

provides the vehicle for raising resources and managing risks. Today, the wheels of the

economy cannot move without the Securities Market. Indeed, it is a modern marvel for

accomplishing astonishing numbers in terms of economic growth.

Further, today’s Securities Markets are absolutely different from what they were 10 years

ago or will be in the next 10 years. They would remain in transition. There would be ups and

downs. Many would succeed and many would vanish along the transformation journey. This

would always be the reconfirmation of the point that businesses are no more businesses; they

have become battles of competency.

To conclude, I would say that the Securities Market opportunity zone is contracting

somewhere and expanding somewhere. This may appear paradoxical. It must be understood

that leadership demands a brilliant focus on emerging opportunities, competence building,

strategies for the leadership position in the opportunity zones and principles-centered

business practices. Therefore, we need to create a culture, which embraces change and

moves ahead with an objective to lead. Let us compete for the future global opportunities.

CHAPTER-8

BIBLIOGRAPHY

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BOOKS:

1. Khan.M.Y, 2006, Financial Services, 3rd Edition, Tata Mcgraw Hill, New delhi-8.

2. Rejda.G.E, 2002, Principles of Risk Management & Insurance, 7th Edition, Pearson

Education.

3. Gordon & Natarajan, 2006, Financial Market and Services, 3rd Edition, Himalaya

Publishing House, Mumbai.

4. Learning cycle in capital market in India By R.khannan.

WEBSITES:www.nseindia.com.

www.bseindia.com.

www.capitalmarket in India.com.

www.wikipedia.org/wiki/capitalmarkets.

www.sebi.gov.in

www.rbi.org.in

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