debraj samanta sip report

8/2/2019 Debraj Samanta Sip Report

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FACULTY MENTOR CERTIFICATE

This is to certify that the project entitled.

has been carried out by.. under my guidance,

in partial fulfillment of the diploma of Post Graduate Program in Management (PGPM) at

United World School of Business, Kolkata, during the academic year 2010-11.

(Faculty Signature)

Faculty Name:

Date:

Place:

DEBRAJ SAMANTA ENROLMENT NO.010201077 1


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STUDENT UNDERTAKING

I, DEBRAJ SAMANTA hereby declare that the PGPM project report entitle THE

IMPACT OF EQUITY MARKET ON SECONDARY MARKET is a bonafide work

done by me based on the Summer Internship Program that I underwent from April June

2010. I also declare that this report has been exclusively prepared for Unitedworld School

of Business, Kolkata and has not been previously submitted to this or any other institution

for a diploma or any other qualification.

(Signature of the Student)

Institute: UNITEDWORLD SCHOOL OF BUSINESS (KOLKATA)

Enrollment No: 010201077Year: 2010-12

Date: 01.07.2011



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ACKNOWLEDGEMENTFirst and foremost, I would like to thank and express my gratitude to Nirmal BangFinancial Group which is a leading organization in Stock & Commodity trading, forgiving me an opportunity to work in their esteemed organization. During my tenure, I

undertook Market Research & Cross selling and gained hands on knowledge aboutthe actual stock market scenario.

My special obligation lies to my corporate guide Mr. Sandip Guhathkurta(AVP) whohas directed me all through.I would also like to mention about my faculty guide, Ms. Smita Chatterjee, withouthis guidance & support,it would not have been possible for me for the completion ofthe project.I also like to thank Mr. Shahzad Khan (Senior Manager-Equity), & Mr. Nadim

Ahmed (Equity Manager) for helping me and providing me useful & necessaryinformation related to the project. I would take this opportunity to thank all seniorexecutives and every associates of Nirmal Bang Group. Without their cooperation Iwould not be able to complete this project.

I would also like to thank all our faculties who have me and have taught me and haveshared their experience with me which has helped me in doing my project.

CONTENTSCERTIFICATE______________________________________________1

ACKNOWLEDGEMENT_____________________________________ 3

EXECUTIVE SUMMERY_____________________________________5

OBJECTIVE OF THE STUDY_________________________________7

COMPANY PROFILE________________________________________8

Services

SWOT ANALYSIS OF THE COMPANY________________________10

THE INDIAN CAPITAL MARKET____________________________11 An Overview Other leading cities in stock market operation



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Growth of Indian Stock Exchanges Sensex and Nifty History Key Milestones

Myths of Stock Market How Stock Market Works

INITIAL PUBLIC OFFERING_____________________________18 Introduction How to apply Public issue How to make Payment for IPOs Role of SEBI in process of IPO

DEMAT ACCOUNT______________________________________20 Introduction How to open Demat account Document required

SEBI (Securities and Exchange Board of India)________________21 Introduction The Board Comprises Functions and Responsibilities

BSE (Bombay Stock Exchange) INTRODUCTION_____________24

NSE (National Stock Exchange)_____________________________25 Introduction NSE group

SENSEX_________________________________________________26 Introduction

SENSEX calculation Methodology Concept of Free Float Definition of Free Float Function and Purpose of Stock Market

DEPOSITORY____________________________________________29 CDSL



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NSDL CSD

FII(Foreign Institutional Investor)____________________________32

Introduction FII mean Regulations

PARTICIPATORY NOTES_________________________________36

SCAMS OF SHARE MARKET______________________________28 Harshad Mehta Scam Ketan Parekhs Scam

Satyam scamRESEARCH METHODOLOGY_____________________________44

Secondary Market Worldwide overview Analysis of Changing Trends in Indian

Stock Market in Last Ten Years

SUGGESTIONS___________________________________________55

CONCLUSION____________________________________________55

BIBLIOGRAPHY__________________________________________56

EXECUTIVE SUMMERY

A secondary market is an area where investors buys or sells securities or financialinstruments from another investor. Stock market predominantly deals in the equityshares. Well regulated and active stock market promotes capital formation. Growth

of the primary market depends on the secondary market. The health of the economyis reflected by the growth of the stock market. The term secondary Market is alsoused to refer to the market for any used goods or assets, or an alternative use for anexisting product or asset were the customer base is the Second Market.With primary issuances of securities or financial instruments, or the primary market,investors purchase these securities directly from issuers such as corporations issuingshares in an IPO or private placement, or directly from the federal government in the



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case of treasuries. After the initial issuance, investors can purchase from otherinvestors in the secondary market.

The secondary market for a variety of assets can vary from fragmented to centralized,and from illiquid to very liquid. The major stock exchanges are the most visible

example of liquid secondary market in this case, for stocks of publicity



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traded companies. Exchanges such as the New York Stock Exchange, NASDAQ andthe American In case of Indian stock market, Bombay Stock Exchange(BSE) andNational Stock Exchange(NSE) are the two important stock exchanges where thetransaction being taken place. A market is an environment that allows buyers andsellers to trade or exchange goods, services, and information. These interactions

define demand and supply characteristics and are therefore fundamental toeconomies. A market can be defined as a place where any type of trade takes place.Markets are dependent on two major participants buyers and sellers. Buyers andsellers typically trade goods, services and/ or information. Historically, markets werephysical meeting places where buyers and sellers gathered together to trade. Althoughphysical markets are still vital, virtual marketplaces supported by IT networks suchas the internet have become the largest and most liquid. Some markets are verycompetitive, with a number of vendors selling the same kinds of products or services.Conversely, some markets have low or no competition, DEBRAJ SAMparticularly if theindustry is protected by government legislation. The number of buyers and sellersinvolved will have a direct bearing on the price of the good or service to be sold, and

has become known as the law of supply and demand. Where there are more sellersthan buyers, the availability of supply will push down prices. If there are more buyersthan sellers, the increased demand will push up prices. Markets can appearspontaneously when there are goods or services to be exchanged, or they can beplanned and regulated .Free markets operate under laissez-fare conditions, in thatthe government does not intervene in how the market operates. These markets may bedistorted if a seller gains monopoly power by managing the majority of supply (orindeed if a buyer develops monophony power by managing demand). Governments ortrade bodies often step in when such distortions undermine the smooth functioning offree markets.

OBJECTIVE OF THE STUDYThe study is on the secondary market in order to judge the acceptability of buyersand seller of the stock market, the tendency of investing of the investors and tounderstand the overall view the stock market.

A. To understand the overview of the market and potential market of NirmalBang.

B. To understand the expectation of traders on secondary market.C. To identify the present and future and traditional secondary market buyer

and seller.

D. To identify the secondary market outlook for 2011 and beyond.

COMPANY PROFILE

D



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Incorporation Year- 1987

Nirmal Bang Group

Incorporated by Mr. Nirmal Bang, it started its equity broking businessoperations in 1987 as a sub-broker. Currently, Group is engaged in various capitalmarket related operations like equity broking, commodity broking, arbitragetrading, investment activities, margin funding, and distribution of the financialproducts. All the group companies are held 100%, directly or in-directly by thepromoters.

Nirmal Bang Securities Private Limited

Nirmal Bang Securities Private Limited is a flag-ship company of Nirmal BangGroup, and started its broking operations under corporate license in 1997.

Currently, NBSPL is engaged in equity broking , arbitrage trading, depositaryoperations and distribution of the financial products. NBSPL is held 100%directly or indirectly by the promoters.

Nirmal Bang Group is one of the largest retail broking houses in India, providingthe investors state of art services in capital markets in the country. We are afinancial service company in India, offering a wide range of financial product andservices targeted at retail investors, high net worth individuals and corporate andinstitutional clients. The group has membership of Bombay Stock ExchangeLimited, National Stock Exchange of India Limited, Multi Commodity Exchangeof India Limited, National Commodity and Derivatives Exchange Limited and asalso a Depository participant of NSDL and CDS (l) L, the Depositories of thecountry.

Our principal group companies are:

Nirmal Bang Securities Private Limited

Member- National Stock Exchange of India LimitedMember- Bombay Stock Exchange LimitedParticipant- National Securities Depositery LimitedParticipent-Central Depository Services (India) Limited

Nirmal Bang Commodities Private Limited



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Member- Multi Commodity Exchange of India Limited

Member- National Commodity & Derivatives Exchange Ltd.

Nirmal Bang Equity Broking Private Limited

Member- Bombay Stock Exchange Limited

Nadi Finance & Investment Private Limited

RBI registered Non Banking Finance Company

Shresth Finance & Investment Service Private Limited

We started in 1986 under the leadership of Late Shri Nirmal Bang and have grownsteadily and progressively since then. Our clients as well as Business Partners havecontributed tremendously to our growth we recognize and applaud this, we value ourrelationship with them and for their convenience we have all investing avenues underone roof.

It is a consistent profit making company from Last 5 years. Its an extremely wellcapitalized company with high Net worth.

SERVICES

EQUITY AND TRADING DERIVATIVES

Trading platform for equities and equity derivatives on NSE and BSE the Companyhas a reach of over 100 branches at 36 locations in the country to cater to retail andhigh net worth individuals.The branches constitute of self owned hubs andfranchise/remissers/sub broker through whom the business is sourced.

COMMODITIESTrading platform for commodities on NCDEX and MCX Commodity trading facilityis provided to all the clients at all the centres and location.The company is planning toestablish itself as a leading research center for commodities market in the country

CURRENCY



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Nirmal Bang also has a currency trading platform for the clients. The company hasits own currency research center. The employees of the company have goodknowledge about currency market which helps the client investing in the currencymarket.

SWOT ANALYSIS OF NIRMAL BANG

Strengths:

Company having young management team which consists of very talentedand knowledge professionals from different fields.

Normal Bang is a well capitalized group with net worth of 3500 crores.

Company is unaffected in this global recession which shows companysnever say die spirit. It means company is armed with proper resources tofight any adverse situation.

Companys research team provides tremendous research calls to theirclients with high success record and generates level of satisfaction toclients.

Weakness:

Investors are not completely aware of Nirmal Bang. So the brand value of thecompany is not yet created.

The market share of the company in commodity and equity market in termsof turnover is not significant.

Opportunities:

The growth of capital market is very high. Investors are now ready to investtheir money in this market because the return is much higher compared toother place for investment. So they are ready to bear risk factor associated

with it. It means volume will increase year by year in this sector. As Nirmal Bang having its presence in 36 location of the country, so company

has good opportunities to extend its branches all over the country.

Company has not come yet with its own IPO. This is a good chance for thecompany to be a public limited company which will help company to getmoney and create brand awareness in this market.



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Threats:

Company has to face tough competition from major market leaders, so it willbe a difficult task for Nirmal Bang to sustain itself in this cut throatcompetitions.

Recently financial market is not performing well due to global recession andinvestors have suffered a huge loss so investors now investing their money atmuch safer place instead of this market.

Company has not come yet with its own IPO. This is a good chance for thecompany to be a public limited company which will help company to get

money and create brand awareness in this market.

AN OVERVIEW OF THE INDIAN CAPITAL MARKET

The Indian capital market is more than a century old. Its history goes back to 1875,when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, theIndian securities market has evolved continuously to become one of the mostdynamic, modern, and efficient securities markets in Asia. Today, Indian marketconfirms to best international practices and standards both in terms of structure and

in terms of operating efficiency .Indian securities markets are mainly governed by a)The Companys Act 1956, b) the Securities Contracts (Regulation) Act 1956 (SCRAAct), and c) the Securities and Exchange Board of India (SEBI) Act, 1992.A briefbackground of these above regulations are given below. a) The Companies Act 1956deals with issue, allotment and transfer of securities and various aspects relating tocompany management. It provides norms for disclosures in the public issues,regulations for underwriting, and the issues pertaining to use of premium anddiscount on various issues. b) SCRA provides regulations for direct and indirectcontrol of stock exchanges with an aim to prevent undesirable transactions insecurities. It provides regulatory jurisdiction to Central Government over stockexchanges, contracts in securities and listing of securities on stock exchanges. c) The

SEBI Act empowers SEBI to protect the interest of investors in the securities market,to promote the development of securities market and to regulate the security market.The Indian securities market consists of primary (new issues) as well as secondary(stock) market in both equity and debt. The primary market provides the channel forsale of new securities, while the secondary market dealsin trading of securities previously issued. The issuers of securities issue (create andsell) new securities in the primary market to raise funds for investment. They do soeither through public issues or private placement. There are two major types of



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issuers who issue securities. The corporate entities issue mainly debt and equityinstruments (shares, debentures, etc.), while the governments (central and stategovernments) issue debt securities (dated securities, treasury bills). The secondarymarket enables participants who hold securities to adjust their holdings in response tochanges in their assessment of risk and return. A variant of secondary market is the

forward market, where securities are traded for future delivery and payment in theform of futures and options. The futures and options can be on individual stocks orbasket of stocks like index. Two exchanges, namely National Stock Exchange (NSE)and the Stock Exchange, Mumbai (BSE) provide trading of derivatives in single stockfutures, index futures, single stock options and index options. Derivatives tradingcommenced in India in June 2000. Other leading cities in stock market operationsAhmedabad gained importance next to Bombay with respect to cotton textileindustry. After 1880, many mills originated from Ahmedabad and rapidly forgedahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad wasrealized and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers'Association". What the cotton textile industry was to Bombay and Ahmedabad, the

jute industry was to Calcutta. Also tea and coal industries were the other majorindustrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's therewas a sharp boom in jute shares, which was followed by a boom in tea shares in the1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, someleading brokers formed "The Calcutta Stock Exchange Association". In the beginningof the twentieth century, the industrial revolution was on the way in India with theSwadeshi Movement; and with the inauguration of the Tata Iron and Steel CompanyLimited in 1907, an important stage in industrial advancement under Indianenterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flourmills and all companies generally enjoyed phenomenal prosperity, due to the FirstWorld War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchangefunctioning in its midst, under the name and style of "The Madras Stock Exchange"with 100 members. However, when boom faded, the number of members stoodreduced from 100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where therewas a rapid increase in the number of textile mills and many plantation companieswere floated. In 1937, a stock exchange was once again organized in Madras - MadrasStock Exchange Association (Pvt) Limited. (In 1957 the name was changed to MadrasStock Exchange Limited). Lahore Stock Exchange was formed in 1934 and it had abrief life. It was merged with the Punjab Stock Exchange Limited, which wasincorporated in 1936. Indian Stock Exchanges - An Umbrella Growth The SecondWorld War broke out in 1939. It gave a sharp boom which was followed by a slump.But, in 1943, the situation changed radically, when India was fullymobilized as asupply base. On account of the restrictive controls on cotton, bullion, seeds and othercommodities, those dealing in them found in the stock market as the only outlet fortheir activities.They were anxious to join the trade and their number was swelled bynumerous others. Many new associations were constituted for the purpose and Stock



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Exchanges in all parts of the country were floated. The Uttar Pradesh Stock ExchangeLimited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad StockExchange Limited (1944) were incorporated. In Delhi twostock exchanges - DelhiStock and Share Brokers' Association Limited and the Delhi Stocks and SharesExchange Limited - were floated and later in June 1947, amalgamated into the Delhi

Stock Exchange Association Limited.

There are two major indicators of Indian capital market- SENSEX &NIFTY:

What are the Sensex & the Nifty?

The Sensex is an "index". What is an index? An index is basically an indicator. Itgives you a general idea about whether most of the stocks have gone up or most of thestocks have gone down. The Sensex is an indicator of allthe major companies of theBSE. The Nifty is an indicator of all the major companies of the NSE. If the Sensex

goes up, it means that the prices of the stocks of most of the major companies on theBSE have gone up. If the Sensex goes down, this tells you that the stock price of mostof the major stocks on the BSE have gone down. Just like the Sensex represents thetop stocks of the BSE, the Nifty represents the top stocks of the NSE. Just in case youare confused, the BSE, is the Bombay Stock Exchange and the NSE is the NationalStock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi.These are the major stock exchanges in the country. There are other stock exchangeslike the Calcutta Stock Exchange etc. but they are not as popular as the BSE and theNSE. Most of the stock trading in the country is done though the BSE & the NSE .Besides Sensex and the Nifty there are many other indexes. There is an index thatgives you an idea about whether the mid-cap stocks go up and down. This is called the

BSE Mid-cap Index. There are many other types of index. Unless stock marketsprovide professionalized service, small investors and foreign investors will not beinterested in capital market operations. And capital market being one of the majorsource of long-term finance for industrial projects, India cannot afford to damage thecapital market path. In this regard NSE gains vital importance in the Indian capitalmarket but if we see the sensex & nifty graph there is a great variation.

HISTORICAL PERSPECTIVE

The history of Indian stock market is about 200 years old. Prior to this the hundis and

bills of exchange were in use, specially in the medieval period, which can beconsidered as a form of virtual stock trading but it was certainly not an organizedstock trading. The recorded stock trading can be traced only after the arrival of EastIndia Company. The first organized stock market that was governed by the rules andregulations came into theexistence in the form of The Native Share and Stock Brokers' Association in 1875.After gone through numerous changes this association is today better as BombayStock Exchange, which remains the premier stock exchange since its inception.



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During this period several other exchanges were launched and some of which wereclosed also. Presently, there are 19 recognized stock exchanges out of which four arenational level exchanges and the remaining are regional exchanges. National StockExchange, established in 1992, was the last exchange. Although the regional levelexchanges are in existence the volume of trading in these exchanges is negligible.

National Stock Exchange and Bombay Stock Exchange are the leaders of IndianSecurities Market in terms of listing, trading and volumes. The last 15 years of theIndian securities market can be considered as the most important part of the historywhere the market gone through the post liberalization era of Indian economy andwitnessed the formation of Securities and Exchange Board of India (SEBI) whichbrought substantial transparency in share market practices and thus managed tobring in trust of not only domestic investors but also the international ones.

The Big Picture of share market.

As investors, most of us tend to forget about all of the good years and only focus on

the bad. The broad markets have been heading up for about four years, so thethoughts of what happened in 1999-2002 are well behind us. But now that the marketsare volatile, there is a lot of talk about the sub prime mortgage industry, a weakdollar, and everyone begins to completely forget about how well the past four yearshave been and only focus on the last few months or weeks complaining how bad it is.Things can certainly continue to get worse, but you have to look at things in context.Remember, what goes up, must come down. Not only does the stock market cycle, butthere is a business cycle as well. We will always have various times that are great, andthose that arent as great, but you cant lose sight of the big picture. Take a look at thefollowing 12 years in a colorized format. Green identifies periods of strong growth.Yellow indicates a period of volatility or no real direction, and red shows a period of a

downward trend. Based on this, is it any surprise that markets are becoming volatileand possibly trending downward? For even more similarities, scroll back up and lookat the first chart from 1996-1999. Now, scroll down and look at the 2005-Presentimage. Notice how similar they are? The markets went up for completely differentreasons, yet are behaving almost the same. All you have to do is look at the followingfew years to see what might be in store for us over the coming year or two. Willhistory repeat itself? There is no way to tell, and anything could happen to make all ofthis information worthless, but you do have to at least consider the past trends andunderstand that there is a chance the market will behave similarly and well enter aperiod of significant decline. The market may be a bit unstable and we may certainlybe headed for a time where the market falls further, but that shouldnt be of much

concern to you if youre investing for the next 10, 20, 30 or more years. If you want totry and time the market or predict what the next hot sector is, thats fine, but the bestthing most people can do is to just continuously invest in a diversified portfolio. If youkeep buying even as the market falls, youre just adding more shares at a lower price.Could you make more money if you only invested at the low points and sold at thehigh points compared to dollar cost averaging? Sure, but the likelihood of succeedingon a regular basis is low. For most people, the best thing to do is to just continueinvesting bi-weekly, monthly, or quarterly into the same diversified portfolio



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regardless of market conditions. When markets are choppy or headed down, yourejust buying stocks or funds on sale. All you have to do is look back a few years to seethat even though the market might go down, it will eventually come back up again.

KEY MILESTONES

Following is the timeline on the rise and rise of the Sensex through Indian stockmarket history. 1830's Business on corporate stocks and shares in Bank and Cottonpresses started in Bombay. 1860-1865 Cotton price bubble as a result of the AmericanCivil War 1870 - 90's Sharp increase in share prices of jute industries followed by aboom in tea stocks and coal 1900s 1978-79 Base year of Sensex, defined to be 100.1986 Sensex first compiled. Using a market Capitalization Weighted methodology for30 component stocks representing well-established companies across key sectors.Since 1990 1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon seasonand excellent corporate results. July 1991 Rupee devalued by 18-19 % 2000, January

15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020followed by the liberal economic policy initiatives undertaken by the then primeminister P.V.Narasimha rao. 3000, February 29, 1992 On February 29, 1992, theSensex surged past the 3000 mark in the wake of the market-friendly Budgetannounced by the then Finance Minister, Dr Manmohan Singh. 4000, March 30, 1992On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on theexpectations of a liberal export-import policy. It was then that the Harshad Mehtascam hit the markets and Sensex witnessed unabated selling.5000, October 8, 1999 OnOctober 8, 1999, the Sensex crossed the 5,000-mark as the BJP-led coalition won themajority in the 13th Lok Sabha election. 6000, February 11, 2000 On February 11,2000, the infotech boom helped the Sensex to cross the 6,000-mark and hit and all

time high of 6,006. 6151, Feb 14, 2000 Tops. Index declines until Sept 2001 and loseshalf the value. Coincides with dot-com bubble burst. 2595, Sept 21, 2001 Bottoms.7000, June 20, 2005 On June 20, 2005, the news of the settlement between the Ambanibrothers boosted investor sentiments and the scrips of RIL, Reliance Energy, RelianceCapital, and IPCL made huge gains. This helped the Sensex crossed 7,000 points forthe first time. 8000, September 8, 2005 On September 8, 2005, the Bombay StockExchange's benchmark 30-share index -- the Sensex -- crossed the 8000 level followingbrisk buying by foreign and domestic funds in early trading. 9000, November 28, 2005The Sensex on November 28, 2005 crossed the magical figure of 9000 to touch 9000.32points during mid-session at the Bombay Stock Exchange on the back of franticbuying spree by foreign institutional investors and well supported by local Operators

as well as retail investors. 10,000, February 6, 2006 The Sensex on February 6, 2006touched 10,003 points during mid-session. The Sensex finally closed above the 10K-mark on February 7, 2006. 11,000, March 21, 2006 The Sensex on March 21, 2006crossed the magical figure of 11,000 and touched a lifetime peak of 11,001 pointsduring mid-session at the Bombay Stock Exchange for the first time. However, it wason March 27, 2006 that the Sensex first closed at over 11,000 points. 12,000, April 20,2006 The Sensex on April 20, 2006 crossed the 12,000-mark and closed at a peak of12,040 points for the first time. 13,000, October 30, 2006 The Sensex on October 30,



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low of 12,822.70 on July 2nd, 2008. This is the lowest that it has ever been in the pastyear. Six months ago, on January 10th, 2008, the market had hit an all time high of21206.70. This is a bad time for the Indian markets, although Reliance and Infosyscontinue to lead the way with mostly positive results. Bloomberg lists them as the toptwo gainers for the Sensex, closely followed by ICICI Bank and ITC Ltd. 11801.70,

Oct 6, 2008 The sensex closed at 11801.70 hitting the lowest in the past 2 years. 10527,Oct 10, 2008 The Sensex today closed at 10527,800.51 points down from the previousday having seen an intraday fall of as large as 1063 points. Thus,this week turned outto be the week with largest percentage fall in the Sensex. 14284.21, May 18, 2009 Afterthe result of 15th Indian general election Sensex gained 2110.79 points form theprevious close of 12173.42 these creates a new histroy in Indian Market. In theOpening Trade itself sensex gain 15% from the previous day close this leads to thesuspension of 2 hours trade. After 2 hours sensex again surged this leads to thesuspension of full day trading.

Myths of stock market

1. You can tell if a Stock is cheap or expensive by the Price to EarningsRatio

False: PE ratios are easy to calculate, that is why they are listed in newspapers etc.But you cannot compare PEs on companies from different industries, as the variablesthose companies and industries have are different. Even comparing within anindustry, PEs dont tell you about many financial fundamentals and nothing about astocks value.

2. To make Money in the Stock Market, you must assume High Risks. False: Tips to Lower your Risk: Do not put more than 10% of your money into any one stock Do not own more than 2-3 stocks in any industry Buy your stocks over time, not all at once Buy stocks with consistent and predictable learning growth Buy stocks with growth rates greater than thetotal of inflation and interest

rates Use stop-loss orders to limit your risk

3. Buy Stocks on the Way Down and Sell on the Way Up.

False: People believe that a falling stock is cheap and a rising stock is too expensive.But on the way down, you have no idea how much further it may fall. If a stock is



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rising, especially if it has broken previous highs, there are no unhappy owners whowant to dump it. If the stock is fairly valued, it should continue to rise.

4. You can Hedge Inflation with Stocks.

False: When interest rates rise, people start to pull moneyout of the market and intobonds, so that pushes prices down. Plus the cost of business goes up, socorporateearnings go down, along with the stock prices.

5. Young People can afford to take High Risk.

False: The only thing true about this is that young people have time on their side ifthey lose all their money. But young people have little disposable income to risklosing. If they follow the tips above, they can make money over many years. Young

people have the time to be patient.

How stock market works

In order to understand what stocks are and how stock markets work, we need to diveinto history--specifically, the history of what has come to be known as thecorporation, or sometimes the limited liability company (LLC). Corporations in oneform or another have been around ever since one guy convinced a few others to pooltheir resources for mutual benefit. The first corporate charters were created inBritain as early as the sixteenth century, but these were generally what we might

think of today as a public corporation owned by the government, like the postalservice.

Privately owned corporations came into being gradually during the early 19thcentury in the United States , United Kingdom and western Europe as thegovernments of those countries started allowing anyone to create corporations. Inorder for a corporation to do business, it needs to get money from somewhere.Typically, one or more people contribute an initial investment to get the company offthe ground. These entrepreneurs may commit some of their own money, but if theydon't have enough, they will need to persuade other people, such as venture capitalinvestors or banks, to invest in their business.

IPO Initial Public Offering

Public issues can be classified into Initial Public offerings and further publicofferings. In a public offering, the issuer makes an offer for new investors to enter itsshareholding family. The issuer company makes detailed disclosures as per the DIP



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guidelines in its offer document and offers it for subscription. Initial Public Offering(IPO ) is when an unlisted company makes either a fresh issue of securities or an offerfor sale of its existing securities or both for the first time to the public. This paves wayfor listing and trading of the issuers securities.IPO is New shares Offered to the public in the Primary Market .The first time the

company is traded on the stock exchange. A prospectus is issued to read about its riskbefore investing. IPO is a company's first sale of stock to the public. Securities offeredin an IPO are often, but not always, those of young, small companies seeking outsideequity capital and a public market for their stock. Investors purchasing stock in IPOsgenerally must be prepared to accept very large risks for the possibility of large gains.Sometimes, Just before the IPO is launched, Existing share Holders get a very liberalbonus issues as a reward for their faith in risking money when the projectwas new

How to apply to a public issue?

When a company floats a public issue or IPO, it prints forms for application to be

filled by the investors. Public issues are open for a few days only. As per law, anypublic issue should be kept open for a minimum of 3days and a maximum of 21 days.For issues, which are underwritten by financial institutions, the offer should be keptopen for a minimum of 3 days and a maximum of 21 days. For issues, which areunderwritten by all India financial institutions, the offer should be kept open for amaximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The dulycomplete application from, accompanied by cash, cheque, DD or stock invest shouldbe deposited before the closing date as per the instruction on the from. IPO's byinvestment companies (closed end funds) usually contain underwriting fees whichrepresent a load to buyers.

Before applying for any IPO , analyse the following factors:

1. Who are the Promoters? What is their credibility and track record?2. What is the company manufacturing or providing services - Product, its potential3. Does the Company have any Technology tie-up? if yes , What is the reputation ofthe collaborators4. What has been the past performance of the Company offering the IPO?5. What is the Project cost, what are the means of financing and profitabilityprojections?6. What are the Risk factors involved?7. Who has appraised the Project? In India Projects apprised by IDBI and ICICI

have more credibility than small Merchant Bankers

How to make payments for IPOs:

The payment terms of any IPO or Public issue is fixed by the company keeping inview its fund requirements and the statutory regulations. In general, companiesstipulate that either the entire money should be paid along with the application or 50percent of the entire amount be paid along with the application and rest on allotment.



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However, if the funds requirements is staggered, the company may ask for the moneyin calls, that is, the company demands for the money after allotment as and when thecash flow demands. As per the statutory requirements, for public issue large than Rs.250 crore, the money is to be collected as under:

25 per cent on application 25 per cent on allotment 50 per cent in two or more calls

The role of SEBI in the process of IPO

SEBI regulates the IPO process and issued detailed Guidelines under section 11 of theSEBI Act, 1992 in the name of SEBI (Disclosure and Investors Protection) Guidelines,2002 generally known as DIP Guidelines. It is also noted that under the provisionssections 55 of the Companies Act, 1956. the matters pertaining to issue and transfer ofsecurities and non payment of dividend in case of listed companies, the companies

intend to get listed are being administered by SEBI.

DEMAT ACCOUNT

Demat refers to a dematerialized account.

Though the company is under obligation to offer the securities in both physical anddemat mode, you have the choice to receive the securities in either mode. If you wishto have securities in demat mode, you need to indicate the depository and also of thedepository participant with whom you have depository account in your application.

It is, however desirable that you hold securities in demat form as physical securitiescarry the risk of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to save your money,make cheque payments etc, Nowadays, you need to open a demat account if you wantto buy or sell stocks.

So it is just like a bank account where actual money is replaced by shares. You haveto approach the DPs (remember, they are like bank branches), to open your demataccount. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro,200 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 areall held electronically in your account. As you buy and sell the shares, they areadjusted in your account. Just like a bank passbook or statement, the DP will provideyou with periodic statements of holdings and transactions.

The most important thing required to trade in share market is Demat account.Demat or Dematerialized account is to store stocks in electronics form. It is just like



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opening a bank account to store your money. Now nobody is interested to keep sharesin physical forms and going for electronic based filing of shares. This has changed thestyle of operation in main Indian stock markets like BSE Sensex ( Bombay StockExchange Sensitive Index) and Nifty (National Stock Exchange of India) and itsbrokers.

How to Open a Demat Account

It is like opening a bank account. You have to approach a depository participants toopen an online trading or demat account. Most of the banks are DPs too.

Documents Required

You will have to submit few documents with the application form to open a demataccount. As per latest Govt of India rule PAN (Personal Account Number) card ismust for opening a demat account. These are the documents required to open a demat

account

1. Photo Copy of PAN Card (Mandatory)

2. Four Passport size photos

3. Address Proof Ration Card/Passport/DrivingLicense/Voters ID Card/BSNL Telephone/LIC Policy

4. Latest Bank Statement and photocopy of BankPassbook

SEBI IntroductionIn 1988 the Securities and Exchange Board of India (SEBI) was established by theGovernment of India through an executive resolution, and was subsequentlyupgraded as a fully autonomous body (a statutory Board) in the year 1992 with thepassing of the Securities and Exchange Board of India Act (SEBI Act) on 30thJanuary 1992. In place of Government Control, a statutory and autonomousregulatory board with defined responsibilities, to cover both development &regulation of the market, and independent powers have been set up. Paradoxically

this is a positive outcome of the Securities Scam of 1990- 91.

The basic objectives of the Board were identified as:

to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and



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for matters connected therewith or incidental thereto.

Since its inception SEBI has been working targetting the securities and is attending tothe fulfillment of its objectives with commendable zeal and dexterity. Theimprovements in the securities markets like capitalization requirements, margining,

establishment of clearing corporations etc. reduced the risk of credit and also reducedthe market.

SEBI has introduced the comprehensive regulatory measures, prescribed registrationnorms, the eligibility criteria, the code of obligations and the code of conduct fordifferent intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters andothers. It has framed bye-laws, risk identification and risk management systems forClearing houses of stock exchanges, surveillance system etc. which has made dealingin securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNXNifty & Sensex) in 2000. A market Index is a convenient and effective productbecause of the following reasons:

It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in caseof Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national

level, and also to diversify the trading products, so that there is an increase in numberof traders including banks, financial institutions,insurance companies, mutual funds,primary dealers etc. to transact through the Exchanges. In this context theintroduction of derivatives trading through Indian Stock Exchanges permitted bySEBI in 2000 AD is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatoryframework for derivatives trading and suggest bye-laws for Regulation and Controlof Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meetingheld on May 11, 1998 accepted the recommendations of the committee andapproved the phased introduction of derivatives trading in India beginning with

Stock Index Futures. The Board also approved the "Suggestive Bye-laws" asrecommended by the Dr LC Gupta Committee for Regulation and Control of Tradingand Settlement of Derivatives Contracts.

SEBI then appointed the J. R. Verma Committee to recommend Risk ContainmentMeasures (RCM) in the Indian Stock Index Futures Market. The report wassubmitted in November 1998.



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However the Securities Contracts (Regulation) Act, 1956 (SCRA) requiredamendment to include "derivatives" in the definition of securities to enable SEBI tointroduce trading in derivatives. The necessary amendment was then carried out bythe Government in 1999. The Securities Laws (Amendment) Bill, 1999 wasintroduced. In December 1999 the new framework was approved.

Derivatives have been accorded the status of `Securities'. The ban imposed on tradingin derivatives in 1969 under a notification issued by the Central Government wasrevoked. Thereafter SEBI formulated the necessary regulations/bye-laws andintimated the Stock Exchanges in the year 2000. The derivative trading started inIndia at NSE in 2000 and BSE started trading in the year 2001.

SEBI is the Regulator for the Securities Market in India. Originally set up by theGovernment of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992being passed by the Indian Parliament.Chaired by C B Bhave, SEBI is headquarteredin the popular business district of Bandra-Kurla complex in Mumbai, and has

Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata,Chennai and Ahmedabad.

Organisation Structure

Chandrasekhar Bhaskar Bhave is the sixth chairman of the Securities MarketRegulator. Prior to taking charge as Chairman SEBI, he had been the chairman ofNSDL (National Securities Depository Limited) ushering in paperless securities. Priorto his stint at NSDL, he had served SEBI as a Senior Executive Director. He is theformer Indian Administrative Service officer of the 1975 batch.

Functions and Responsibilities

SEBI has to be responsive to the needs of three groups, which constitute the market: the issuers of securities the investors the market intermediaries.

SEBI has three functions rolled into one body quasilegislative, quasi-judicial andquasi-executive. It drafts regulations in its legislative capacity, it conductsinvestigation and enforcement action in its executive function and it passes rulingsand orders in its judicial capacity. Though this makes it very powerful, there is anappeals process to create accountability. There is a Securities Appellate Tribunalwhich is a three member tribunal and is presently headed by a former Chief Justice ofa High court - Mr. Justice NK Sodhi. A second appeal lies directly to the SupremeCourt.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively andsuccessively (e.g. the quick movement towards making the markets electronic and



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paperless rolling settlement on T+2 basis). SEBI has been active in setting up theregulations as required under law. It is regulating body.

INTRODUCTION BSE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, nowspanning three centuries in its 133 years of existence. What is now popularly knownas BSE was established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition(in 1956) from the Government of India under the Securities Contracts(Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of theIndian capital market is widely recognized. It migrated from the open outcry systemto an online screen-based order driven trading system in 1995. Earlier an Association

Of Persons (AOP), BSE is now a corporative and demutualised entity incorporatedunder the provisions of the Companies Act, 1956, pursuant to the BSE(Corporatisation and Demutualization) Scheme, 2005 notified by the Securities andExchange Board of India (SEBI). With demutualisation, BSE has two of world's bestexchanges, Deutsche Brse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sectorby providing it with an efficient access to resources. There is perhaps no majorcorporate in India which has not sourced BSE's services in raising resources from thecapital market.

Today, BSE is the world's number 1 exchange in terms of the number of listedcompanies and the world's 5th in transaction numbers. The market capitalization ason December 31, 2007 stood at USD 1.79 trillion . An investor can choose from morethan 4,700 listed companies, which for easy reference, are classified into A, B, S, Tand Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconicstature , and is tracked worldwide. It is an index of 30 stocks representing 12 majorsectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive tomarket sentiments and market realities. Apart from the SENSEX, BSE offers 21indices, including 12 spectral indices. BSE has entered into an index cooperation

agreement with Deutsche Brse. This agreement has made SENSEX and other BSEindices available to investors in Europe and America. Moreover, Barclays GlobalInvestors (BGI), the global leader in ETFs through its iShares brand, has createdthe 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETFenables investors in Hong Kong to take an exposure to the Indian equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE.It brings to the investors a trading tool that can be easily used for the purposes of



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investment, trading, hedging and arbitrage. SPIcE allows small investors to take along-term view of the market.

BSE provides an efficient and transparent market for trading in equity, debtinstruments and derivatives. It has a nation-wide reach with a presence in more than

359 cities and towns of India. BSE has always been at par with the internationalstandards. The systems and processes are designed to safeguard market integrity andenhance transparency in operations. BSE is the first exchange in India and the secondin the world to obtain an ISO 9001:2000 certification. It is also the first exchange inthe country and second in the world to receive Information Security ManagementSystem Standard BS 7799-2-2002 certification for its BSE On-line Trading System(BOLT).

BSE continues to innovate. In recent times, it has become the first national level stockexchange to launch its website in Gujarati and Hindi to reach out to a larger numberof investors. It has successfully launched a reporting platform for corporate bonds in

India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information dissemination tothe common man on the street.

INTRODUCTION NATIONAL STOCK EXCHANGE

The National Stock Exchange (NSE), located in Bombay, is India's first debt market.It was set up in 1993 to encourage stock exchange reform through system

modernization and competition. It opened for trading in mid-1994. It was recentlyaccorded recognition as a stock exchange by the Department of Company Affairs.The instruments traded are, treasury bills, government security and bonds issued bypublic sector companies.

The Organization

The National Stock Exchange of India Limited has genesis in the report of the HighPowered Study Group on Establishment of New Stock Exchanges, whichrecommended promotion of a National Stock Exchange by financial institutions (FIs)to provide access to investors from all across the country on an equal footing. Basedon the recommendations, NSE was promoted by leading Financial Institutions at thebehest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation)Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market(WDM) segment in June 1994. The Capital Market (Equities) segment commenced



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operations in November 1994 and operations in Derivatives segment commenced inJune 2000.

Listing

NSE plays an important role in helping an Indian companies access equity capital, byproviding a liquid and well-regulated market. NSE has about 1319 companies listedrepresenting the length, breadth and diversity of the Indian economy which includesfrom hi-tech to heavy industry, software, refinery, public sector units, infrastructure,and financial services. Listing on NSE raises a companys profile among investors inIndia and abroad. Trade data is distributed worldwide through various news vendingagencies. More importantly, each and every NSE listed company is required to satisfystringent financial, public distribution and management requirements. High listingstandards foster investor confidence and also bring credibility into the markets.

NSE lists securities in its Capital Market (Equities) segment and its Wholesale DebtMarket segment

Introduction of SENSEX

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-establishedand financially sound companies across key sectors. The base year of SENSEX wastaken as 1978-79. SENSEX today is widely reported in both domestic andinternational markets through print as well as electronic media. It is scientifically

designed and is based on globally accepted construction and review methodology.Since September 1, 2003, SENSEX is being calculated on a free float marketcapitalization methodology. The "free-float market capitalization-weighted"methodology is a widely followed index construction methodology on which majorityof global equity indices are based; all major index providers like MSCI, FTSE,STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade.Right from early nineties, the stock market witnessed heightened activity in terms ofvarious bull and bear runs. In the late nineties, the Indian market witnessed a hugefrenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the

investors. SENSEX has captured all these happenings in the most judicious manner.One can identify the booms and busts of the Indian equity market through SENSEX.As the oldest index in the country, it provides the time series data over a fairly longperiod of time (from 1979onwards). Small wonder, the SENSEX has become one of the most prominent brandsin the country.



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SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology,wherein, the level of index at any point of time reflects the free-float market value of30 component stocks relative to a base period. The market capitalization of a

company is determined by multiplying the price of its stock by the number of sharesissued by the company. This market capitalization is further multiplied by the free-float factor to determine the free float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This isoften indicated by the notation 1978-79=100. The calculation of SENSEX involvesdividing the free-float market capitalization of 3 companies in the Index by a numbercalled the Index Divisor. The Divisor is the only link to the original base period valueof the SENSEX. It keeps the Index comparable over time and is the adjustment pointfor all Index adjustments arising out of corporate actions, replacement of scrips etc.During market hours, prices of the index scrips, at which latest trades are executed,

are used by the trading system to calculate SENSEX every 15 seconds. The value ofSENSEX is disseminated in real time.

Concept of FREE FLOAT

Free-float methodology refers to an index construction methodology that takes intoconsideration only the free float market capitalization of a company for the purposeof index calculation and assigning weight to stocks in the index. Free-float marketcapitalization takes into consideration only those shares issued by the company thatare readily available for trading in the market. It generally excludes promoters'

holding, government holding, strategic holding and other locked-in shares that willnot come to the market for trading in the normal course. In other words, the marketcapitalization of each company in a free-float index is reduced to the extent of itsreadily available shares in the market.

Definition of Free-float

Shareholding of investors that would not, in the normal course come into the openmarket for trading are treated as 'Controlling/ Strategic Holdings' and hence notincluded in free-float. Specifically, the following categories of holding are generallyexcluded from the definition of Free float:

Shares held by founders/directors/ acquirers whichhas control element

Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/individuals



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Equity held by associate/group companies (crossholdings) Equity held by Employee Welfare Trusts Locked-in shares and shares which would not be sold in the open market in

normal course.

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update thebase year average. The base year value adjustment ensures that replacement of stocksin Index, additional issue of capital and other corporate announcements like 'rightsissue' etc. do not destroy the historical value of the index. The beauty of maintenancelies in the fact that adjustments for corporate actions in the Index should not per seaffect the index values.

TheBSE Index Cell does the day-to-day maintenance of the index within the broadindex policy framework set by the BSE Index Committee. The BSE Index Cellensuresthat SENSEX and all the other BSE indices maintain their benchmark properties bystriking a delicate balance between frequent replacements in index and maintainingits historical continuity. The BSE Index Committee comprises of capital marketexpert, fund managers, market participants and members of the BSE GoverningBoard.

Function and purpose of stock market

The stock market is one of the most important sources for companies to raise money.

This allows businesses to be publicly traded, or raise additional capital for expansionby selling shares of ownership of the company in a public market. The liquidity thatan exchange provides affords investors the ability to quickly and easily sell securities.This is an attractive feature of investing in stocks, compared to other less liquidinvestments such as real estate.

History has shown that the price of shares and other assets is an important part of thedynamics of economic activity, and can influence or be an indicator of social mood.An economy where the stock market is on the rise is considered to be an up andcoming economy. In fact, the stock market is often considered the primary indicatorof a country's economic strength and development. Rising share prices, for instance,

tend to be associated with increased business investment and vice versa. Share pricesalso affect the wealth of households and their consumption. Therefore, central bankstend to keep an eye on the control and behavior of the stock market and, in general,on the smooth operation of financial system functions. Financial stability is the raisond'tre of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that theycollect and deliver the shares, and guarantee payment to the seller of a security. This



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eliminates the risk to an individual buyer or seller that the counterparty could defaulton the transaction.

The smooth functioning of all these activities facilitates economic growth in that lowercosts and enterprise risks promote the production of goods and services as well as

employment. In this way the financial system contributes to increased prosperity.

Depository

What is a Depository?

A depository holds shares and other securities of investors in electronic form.Through Depository Participants (DPs), it also provides services related totransactions in securities. Its structure and functioning are similar to the Bank.Presently in India, there are two depository viz. National Securities Depository

Limited (NSDL) and Central Depository Services (I) Limited (CDSL). Both of themare registered with SEBI.

What is a DP?

DP is a member of a Depository who offers its services to hold securities of Investors(Beneficial Owners) in dematerialized form. DP is like a Bank branch. It is an agent

of the depository. DP works as an interface between Depository and Investors. DPsare required to be registered with SEBI. If an investor wants to avail the servicesoffered by Depository, he has to open a Demat account with DP similar to opening ofa bank account with a branch of the bank.

Depository is responsible for keeping stocks of investors in electronics form. Thereare two depositories in India, NSDL (National Securities Depository Ltd) and CDSL(Central Depository Services Ltd).

CDSL (Central Depository Services Ltd.)

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leadingbanks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank,Standard Chartered Bank, Union Bank of India and Centurion Bank.

CDSL was set up with the objective of providing convenient, dependable and securedepository services at affordable cost to all market participants. Some of theimportant milestones of CDSL system are:



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CDSL received the certificate of commencement of business from SEBI in February,1999.

Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operationsof CDSL on July 15, 1999.

Settlement of trades in the demat mode through BOI Shareholding Limited, theclearing house of BSE, started in July 1999.

All leading stock exchanges like the National Stock Exchange, Calcutta StockExchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc haveestablished connectivity with CDSL.

As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,bonds, debentures, commercial papers), units of mutual funds, certificate of depositsetc. into the CDSL system.

About NSDLAlthough India had a vibrant capital market which is more than a century old, thepaper-based settlement of trades caused substantial problems like bad delivery anddelayed transfer of title till recently. The enactment of Depositories Act in August1996 paved the way for establishment of National Securities Depository Limited(NSDL), the first depository in India. This depository promoted by institutions ofnational stature responsible for economic development of the country has sinceestablished a national infrastructure of international standards that handles most of

the securities held and settled in dematerialised form in the Indian capital market.

Using innovative and flexible technology systems, NSDL works to support theinvestors and brokers in the capital market of the country. NSDL aims at ensuringthe safety and soundness of Indian marketplaces by developing settlement solutionsthat increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet butcentral role in developing products and services that will continue to nurture thegrowing needs of the financial services industry.

In the depository system, securities are held in depository accounts, which is more orless similar to holding funds in bank accounts. Transfer of ownership of securities is

done through simple account transfers. This method does away with all the risks andhassles normally associated with paperwork. Consequently, the cost of transacting ina depository environment is considerably lower as compared to transacting incertificates Promoters / Shareholders NSDL is promoted by Industrial DevelopmentBank of India Limited (IDBI) - the largest development bank of India, Unit Trust ofIndia (UTI) - the largest mutual fund in India and National Stock Exchange of IndiaLimited (NSE) - the largest stock exchange in India. Some of the prominent banks inthe country have taken a stake in NSDL.



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NSDL Facts & Figures

As on December 31, 2008

Number of certificates eliminated (Approx.) : 550 Crore Number of companies in which more than 75% shares are dematted : 2282 Average number of accounts opened per day since November 1996 : 3636 Presence of demat account holders in the country : 78% of all pincodes in the

country.

Central Securities Depository (CSD)

A Central Securities Depository (CSD) is an organization holding securities

either in certificated or uncertificated (dematerialized) form, to enable book entrytransfer of securities. In some cases these organizations also carry out centralizedcomparison, and transaction processing such as clearing and settlement of securities.The physical securities may be immobilised by the depository, or securities may bedematerialised (so that they exist only as electronic records).

International Central Securities Depository (ICSD) is a central securitiesdepository that settles trades in international securities and in various domesticsecurities, usually through direct or indirect (through local agents) links to localCSDs. ClearStream International (earlier Cedel), Euro clear and SIX SIS areconsidered ICSDs. While some view The Depository Trust Company (DTC) as anational CSD rather than an ICSD, in fact DTC thelargest depository in the world-- holds over $2 trillion in non-US securities and in American Depository Receiptsfrom over 100 nations.

Functions

Safekeeping Securities may be in dematerialized form, book-entry onlyform (with one or more "global" certificates), or in physical form immobilizedwithin the CSD.

Deposit and Withdrawal Supporting deposits and withdrawals involvesthe relationship between the transfer agent and/or issuers and the CSD. It alsocovers the CSD's role within the underwriting process or listing of new issuesin a market.

Dividend, interest, and principal processing, as well as corporate

actions including proxy voting Paying and transfer agents, as well as



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issuers areinvolved in these processes, depending on the levelof servicesprovided by the CSD and its relationshipwith these entities.

Other services CSDs offer additional services aside from those consideredcore services. These services include Securities Lending and Borrowing,

Matching, and Repo Settlement

Pledge - Central depositories provide pledging of share and securities. Everycountry require to provide legal framework to protect the interest of thepledgor and pledgee.

However, there are risks and responsibilities regarding these services that must betaken into consideration in analyzing and evaluating each market on a case-by-casebasis.

FII (Foreign Institutional Investors) inIndian Stock Market

Foreign Institutional Investor (FII) is used to denote an investor - mostly of theform of an institution or entity, which invests money in the financial markets of acountry different from the one where in the institution or entity was originallyincorporated.

FII investment is frequently referred to ashot moneyfor the reason that it can leave

the country at the same speed at which it comes in.In countries like India, statutory agencies like SEBI have prescribed norms to

register FIIs and also to regulate such investments flowing in through FIIs. In 2008,FIIs represented the largest institution investment category, with an estimated US$751.14 billion.

Since 1990-91, the Government of India embarked on liberalization and economicreforms with a view of bringing about rapid and substantial economic growth andmove towards globalization of the economy. As a part of the reforms process, theGovernment under its New Industrial Policy, revamped its foreign investment policy

recognizing the growing importance of foreign direct investment as an instrument oftechnology transfer, augmentation of foreign exchange reserves and globalization ofthe Indian economy. Simultaneously, the Government, for the first time, permittedportfolio investments from abroad by foreign institutional investors in the Indiancapital market. The entry of FIIs seems to be a follow up of the recommendation ofthe Narsimhan Committee Report on Financial System. While recommending theirentry, the Committee, however did not elaborate on the objectives of the suggested



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policy. The committee only suggested that the capital market should be graduallyopened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest inall the securities traded on the primary and secondary markets, including shares,

debentures and warrants issued by companies which were listed or were to be listedon the Stock Exchanges in India.

While presenting the Budget for 1992-93, the then Finance Minister Dr. ManmohanSingh had announced a proposal to allow reputed foreign investors, such as PensionFunds etc., to invest in Indian capital market. To operationalise this policyannouncement, it had become necessary to evolve guidelines for such investments byForeign Institutional Investors (FIIs). The policy framework for permitting FIIinvestment was provided under the Government of India guidelines vide Press Notedate September 14, 1992. The guidelines formulated in this regard were as follows:

1. Foreign Institutional Investors (FIIs) including institutions such as PensionFunds, Mutual Funds, Investment Trusts, Asset Management Companies,Nominee Companies and Incorporated/Institutional Portfolio Managers ortheir power of attorney holders (providing discretionary and nondiscretionaryportfolio management services) would be welcome to make investments underthese guidelines.

2. FIIs would be welcome to invest in all the securities traded on the Primary andSecondary markets, including the equity and other securities/instruments ofcompanies which are listed/to be listed on the Stock Exchanges in Indiaincluding the OTC Exchange of India. These would include shares,debentures, warrants, and the schemes floated by domestic Mutual Funds.Government would even like to add further categories of securities later fromtime to time.

3. FIIs would be required to obtain an initial registration with Securities andExchange Board of India (SEBI), the nodal regulatory agency for securitiesmarkets, before any investment is made by them in the Securities of companieslisted on the Stock Exchanges in India, in accordance with these guidelines.Nominee companies, affiliates and subsidiary companies of a FII would betreated as separate FIIs for registration, and may seek separate registrationwith SEBI.

4. Since there were foreign exchange controls in force, for various permissionsunder exchange control, along with their application for initial registration,FIIs were also supposed to file with SEBI another application addressed toRBI for seeking various permissions under FERA, in a format that would bespecified by RBI for the purpose. RBI's general permission would be obtained



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by SEBI before granting initial registration and RBI's FERA permissiontogether by SEBI, under a single window approach.

5. For granting registration to the FII, SEBI should take into account the trackrecord of the FII, its professional competence, financial soundness, experience

and such other criteria that may be considered by SEBI to be relevant.Besides, FII seeking initial registration with SEBI were be required to hold aregistration from the Securities Commission, or the regulatory organisationfor the stock market in the country of domicile/incorporation of the FII.

6. SEBI's initial registration would be valid for five years. RBI's generalpermission under FERA to the FII would also hold good for five years. Bothwould be renewable for similar five year periods later on.

7. RBI's general permission under FERA would enable the registered FII to buy,

sell and realize capital gains on investments made through initial corpusremitted to India, subscribe/renounce rights offerings of shares, invest on allrecognized stock exchanges through a designated bank branch, and to appointa domestic Custodian for custody of investments held.

8. This General Permission from RBI would also enable the FII to:

Open foreign currency denominated accounts in a designated bank.(There could even be more than one account in the same bank brancheach designated in different foreign currencies, if it is so required by

FII for its operational purposes); Open a special non-resident rupee account to which could be creditedall receipts from the capital inflows, sale proceeds of shares, dividendsand interests;

Transfer sums from the foreign currency accounts to the rupeeaccount and vice versa, at the market rate of exchange;

Make investments in the securities in India out of the balances in therupee account;

Transfer repatriable (after tax) proceeds from the rupee account to theforeign currency account(s);

Repatriate the capital, capital gains, dividends, incomes received by

way of interest, etc. and any compensation received towardssale/renouncement of rights offerings of shares subject to thedesignated branch of a bank/the custodian being authorized to deductwith holding tax on capital gains and arranging to pay such tax andremitting the net proceeds at market rates of exchange;

Register FII's holdings without any further clearance under FERA.



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What DoesForeign Institutional Investor FII Mean?

An investor or investment fund that is from or registered in a country outside of theone in which it is currently investing. Institutional investors include hedge funds,insurance companies, pension funds and mutual funds.

Regulation imposed by SEBI on FII

(a)"Act" means the Securities and Exchange Board of India Act, 1992 (15 of1992);

(b) "certificate" means a certificate of registration granted by the Board underthese regulations;

(c) "designated bank" means any bank in India, which has been authorised by theReserve Bank of India to act as a banker to Foreign Institutional Investors;

(d) "domestic custodian" includes any person carrying on the activity of providingcustodial services in respect of securities;

(e) "Enquiry officer" means any officer of the Board, or any other personappointed by the Board under Chapter V of these regulations;

(f) "Foreign Institutional Investor" means an institution established orincorporated outside India which proposes to make investment in India insecurities;

(g) "Form" means a form specified in the First Schedule to these regulations;

(h) "Government of India Guidelines" means the guidelines dated September 14,1992 issued by the Government of India for Foreign Institutional Investors, asamended from time to time;

(i) "institution" includes every artificial juridical person;

(j) "schedule" means a schedule to these regulations;

(k) "sub-account" includes those institutions, established or incorporated outside

India and those funds, or portfolios, established outside India, whetherincorporated or not, on whose behalf investments are proposed to be made inIndia by a Foreign Institutional Investor.

Participatory notes (P- Notes)



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Participatory notes (PNs / P-Notes) are instruments used by investors or hedge fundsthat are not registered with the SEBI (Securities & Exchange Board of India) to investin Indian securities. Participatory notes are instruments that derive their value froman underlying financial instrument such as an equity share and, hence, the word,

'derivative instruments'. SEBI permitted FIIs to register and participate in the indianstock market in 1992.

Indian based brokerages buy Indian-based securities and then issue PNs to foreigninvestors.

Any dividends or capital gains collected from the underlying securities go back to theinvestors.

Participatory notes are instruments used for making investments in the stockmarkets. However, they are not used within the country. They are used outside India

for making investments in shares listed in that country. That is why they are alsocalled offshore derivative instruments.

In the Indian context, foreign institutional investors (FIIs) and their sub-accountsmostly use these instruments for facilitating the participation of their overseas clients,who are not interested in participating directly in the Indian stock market. Forexample, Indian-based brokerages buy India-based securities and then issueparticipatory notes to foreign investors. Any dividends or capital gains collected fromthe underlying securities go back to the investors. According to an expert groupconstituted by the finance ministry in India, in August 2004, participatory notesconstituted about 46 per cent of the cumulative net investments in equities by FIIs.

Any entity investing in participatory notes is not required to register with SEBI(Securities and Exchange Board of India), whereas all FIIs have to compulsorily getregistered. Trading through participatory notes is easy because participatory notesare like contract notes transferable by endorsement and delivery. Secondly, some ofthe entities route their investment through participatory notes to take advantage ofthe tax laws of certain preferred countries. Thirdly, participatory notes are popularbecause they provide a high degree of anonymity, which enables large hedge funds tocarry out their operations without disclosing their identity.

Participatory notes in brief is as follows :

What are participatory notes or PNs? Participatory notes are instruments used byforeign funds which are not registered to trade in domestic Indian Capital Markets.PNs are derivative instruments issued against an underlying security permittingholders to get a share in the income from the security.



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How does it work? Investors who buy PNs deposit their funds in US or Europeanoperations of Foreign Institutional Investors (FII) operating in India . The FII uses itsproprietary account to buy stocks.

Why do investors use PNs? Reason for using PNs is to keep investor name

anonymous, some investors have used them to save transaction and overhead costs.Tax officials fear that PNs are becoming a favourite with a host of Indian moneylaunderers who use them to first take funds out of country through hawala and thenget it back using PNs.

Participatory Notes Crisis of 2007

On the 16th of October, 2007, SEBI (Securities & Exchange Board of India) proposedcurbs on participatory notes which accounted for roughly 50% of FII investment in2007. SEBI was not happy with P-Notes because it is not possible to know who owns

the underlying securities and hedge funds acting through PNs might therefore causevolatility in the Indian markets.

However the proposals of SEBI were not clear and this led to a knee-jerk crash whenthe markets opened on the following day (October 17, 2007). Within a minute ofopening trade, the Sensex crashed by 1744 points or about 9% of its value - thebiggest intra-day fall in Indian stock-markets in absolute terms. This led to automaticsuspension of trade for 1 hour. Finance Minister P.Chidambaram issuedclarifications, in the meantime, that the government was not against FIIs and was notimmediately banning PNs. After the markets opened at 10:55 am, they staged aremarkable comeback and ended the day at 18715.82, down just 336.04 from

Tuesdays close after tumbling to a days low of 17307.90.

This was, however not the end of the volatility. The next day (October 18, 2007), theSensex tumbled by 717.43 points 3.83 per cent to 17998.39, its second biggestfall. The slide continued the next day when the Sensex fell 438.41 points to settle at17559.98 at the end of the week, after touching the lowest level of that week at17226.18 during the day.

The SEBI chief, M.Damodaran held an hour long conference on the 22nd of Octoberto clear the air on the proposals to curb PNs where he announced that funds investingthrough PNs were most welcome to register as FIIs, whose registration process would

be made faster and more steamlined. The markets welcomed the clarifications with an879-point gain its biggest single-day surge on October23, thus signalling the endof the PN crisis. SEBI issued the fresh rules regarding PNs on the 25th of October,2007 which said that FIIs cannot issue fresh PNotes and existing exposures were to bewound up within 18 months.



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SCAM S OF SHARE MARKET

HARSHAD MEHTA SCAMHarshad Mehta was an Indian stockbroker and is alleged to have engineered therise in the BSE stock exchange in the year 1992. Exploiting several loopholes in thebanking system, Mehta and his associates siphoned off funds from inter-banktransactions and bought shares heavily at a premium across many segments,triggering a rise in the Sensex. When the scheme was exposed, the banks starteddemanding the money back, causing the collapse. He was later charged with 72criminal offenses and more than 600 civil action suits were filed against him. He diedin 2002 with many litigations still pending against him.

Early LifeHarshad Shantilal Mehta was born in a Gujarati Jain family of modest means. Hisearly childhood was spent in Mumbai where his father was a small-time businessman.Later, the family moved to Raipur in Madhya Pradesh after doctors advised hisfather to move to a drier place on account of his indifferent health. But Raipur couldnot hold back Mehta for long and he was back in the city after completing hisschooling.Mehta gradually rose to become a stock broker on the Bombay Stock Exchange andlived almost like a movie star in a 15,000 square feet apartment, which had aswimming pool as well as a golf patch. He also had a taste for flashy cars, whichultimately led to his downfall. The year was 1990. Years had gone by and the drivingambitions of a young man in the faceless crowd had been realised. Harshad Mehtawas making waves in the stock market. He had been buying shares heavily since thebeginning of 1990. The shares which attracted attention were those of AssociatedCement Company (ACC),. The price of ACC was bid up to Rs 10,000. For those whoasked, Mehta had the replacement cost theory as an explanation. The theory basicallyargues that old companies should be valued on the basis of the amount of moneywhich would be required to create another such company.

Through the second half of 1991, Mehta was the darling of the business media andearned the sobriquet of the Big Bull, who was said to have started the bull run. But,where was Mehta getting his endless supply of money from? Nobody had a clue.

On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India,exposed the dubious ways of Harshad Metha. The broker was dipping illegally intothe banking system to finance his buying.

In 1992, when I broke the story about the Rs 600 crore that he had swiped from theState Bank of India, it was his visits to the banks headquarters in a flashy ToyotaLexus that was the tip-off. Those days, the Lexus had just been launched in theinternational market and importing it cost a neat package, Dalal wrote in one of hercolumns later.



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The authors explain: The crucial mechanism through which the scam was effectedwas the ready forward (RF) deal. The RF is in essence a secured short-term (typically15-day) loan from one bank to another. Crudely put, the bank lends againstgovernment securities just as a pawnbroker lends against jewellery. The borrowingbank actually sells the securities to the lending bank and buys them back at the end of

the period of the loan, typically at a slightly higher price.It was this ready forward deal that Harshad Mehta and his cronies used with greatsuccess to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieuof a commission. The broker handles neither the cash nor the securities, though thatwasnt the case in the lead-up to the scam.

In this settlement process, deliveries of securities and payments were made throughthe broker. That is, the seller handed over the securities to the broker, who passed

them to the buyer, while the buyer gave the cheque to the broker, who then made thepayment to the seller.

In this settlement process, the buyer and the seller might not even know whom theyhad traded with, either being know only to the broker.

This the brokers could manage primarily because by now they had become marketmakers and had started trading on their account. To keep up a semblance of legality,they pretended to be undertaking the transactions on behalf of a bank.Another instrument used in a big way was the bankreceipt (BR). In a ready forwarddeal, securities were not moved back and forth in actuality. Instead, the borrower, i.e.the seller of securities, gave the buyer of the securities a BR.

As