3 Chapter 3 Industry Profile

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INDUSTRY PROFILE

Indian financial system:

FINANCIAL MARKET:

Financial markets are helpful to provide liquidity in the system and for smooth

functioning of the system. These markets are the centers that provide facilities for buying

and selling of financial claims and services. The financial markets match the demands ofinvestment with the supply of capital from various sources.

INDIAN FINANCIAL SYSTEM


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According to functional basis financial markets are classified into two types. They are:

Money markets (short term) Capital market (long term)According to institutional basis again classified into two types.

They are;

Organized financial market Non- organized financial market.

The organized market comprises of official market represented by recognized

institutions. Bank and government (SEBI) registered/controlled activities and intermediaries.

The unorganized market is composed of indigenous bankers moneylenders individual

professional and non professionals.

MONEY MARKET:

Money market is a place where we can raise short- term capital.

Again the money market is classified in to

Bank calls money market. Bill market. Bank loan market etc.e.g.: treasury bills, commercial papers, CDs, etc.

CAPITAL MARKET:

Capital market is a place where we can raise long-term capital.

Again the capital market is classified in to 2 types and they are

Primary market. Secondary market.e.g.: Shares Debentures and Loans etc.

PRIMARY MARKET:

Primary market is generally referred to the market of new issues or market for

mobilization of resources by the companies and government undertakings for new projects

as also for expansion modernization addition diversification and up gradation. Primary

market is also referred to as new issue market primary market operations include new issue


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of shares by new and existing companies further and right issues to existing shareholders

public offers and issue of debt instruments such as debentures bonds etc.

The primary market is regulated by the Securities and Exchange Board of India (SEBI

a government regulated authority).

FUNCTIONS OF PRIMARY MARKET:

The main services of the primary market are origination underwriting and

distribution. Origination deals with the origin of the new issue. Underwriting contract make

the shares predictable and remove the element of uncertainty in the subscription.

Distribution refers to the sale of securities to the investors.

The following are the market intermediaries associated with the market:

1. Merchant banker/book building lead manager.2. Registrar and transfer agent.3. Underwriter/broker to the issue.4. Adviser to the issue.5. Banker to the issue.6. Depository.7. Depository participant.

INVESTORS PROTECTION IN PRIMARY MARKETS:

To ensure healthy growth of primary market the investing public should be

protected the term investor protection as a wider meaning in the primary market. The

principal ingredients of investors protection are

Provision of all the relevant information. Provision of accurate information. Transparent allotment procedures without any bias.SECONDARY MARKET:

The primary market deals with the new issues of securities. Outstanding securities

are traded in the secondary market which is commonly known as stock market or stock

exchange the secondary market is a market where scrips are traded. It is a market place

which provides liquidity to the scrips issued in the primary market. Thus the growth of

secondary market depends on the primary market. More the number of companies entering

the primary market the greater are the volume of trade at the secondary market. Trading


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activities in the secondary market are done through the recognized stock exchanges which

are 23 in number including over the Counter Exchange of India National Stock Exchange of

India and Interconnected Stock Exchange of India.

Secondary market operations involve buying and selling of securities on the stockexchange through its members. The companies hitting the primary market are mandatory

required to list their shares on one or more stock exchange in India including stock

exchanges. Listing of scrips provides liquidity and offers on opportunity to the investors to

buy or sell the scrips.

The following intermediaries in the secondary market:

1. Broker/member of stock exchange-buyers broking and seller broker.2. Portfolio manager.3. Investment advisor.4. Share transfer agent.5. Depository.6. Depository participants.

DEFINITION OF STOCK EXCHANGE:

Stock exchange means anybody or individuals whether incorporated or not constituted

for the purpose of assisting regulating or controlling the business of buying selling or

dealing in securities.

Stock Exchange

Stocks (shares, equity) are traded in stock exchange. India has two big stock

exchanges (Bombay stock exchange - BSE and national stock exchange - NSE) and few small

exchanges like Jaipur stock exchange etc.

Investor can trade stocks in any of the stock exchange in India.

The securities include:

1. Shares scrip stocks bonds Debentures stock or other marketable securities of a likenature in or of any incorporated company or body corporate.

2. Government securities: and Rights or interest in securities.


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HISTORY OF STOCK EXCHANGE:

The only stock exchange operating in the 19th

century were those of Mumbai setup

in 1875 and Ahmadabad set up in 1894. These were organized as voluntary non-profit-

making associations of brokers to regulate and protect their interests. Before the control on

securities under the constitution in 1950 it was a state subject and the Bombay securities

contracts (control) act of 1925 used to regulate trading is securities. Under this act the

Mumbai stock exchange was recognized in1927 and Ahmadabad in 1937. During the war

boom a number of stock exchanges were organized. Soon after it become a central subject

central legislation was proposed and a committee headed by A.D. Gorwala went into the bill

for securities regulation. On the basis of the committees recommendations and public

discussion the securities contract (regulation) act become law in 1956.

FUNCTIONS OF STOCK EXCHANGE:

Stock exchanges provide liquidity to the listed companies. By giving quotations to

the listed companies they help trading and raise funds from the market savings of investors

flow into public loans and to joint-stock enterprises because of this ready marketability and

unequalled facility for transfer of owner ship of stocks shares and securities provided by the

recognized stock exchange as a result over the hundred and twenty years during which the

stock exchanges have existed in this country and through their medium the central and state

government have raised crores of rupees by floating public loans municipal corporations

improvement trust local bodies and state finance corporation have obtained from the public

their financial requirements and industry trade and commerce- the backbone of the

countrys economy-have secured capital of crores or rupees through the issue of stocks

shares and debentures for financing their day-to-day actives organizing new ventures and

completing projects of expansion diversification and modernization. By obtaining the listing

and trading facilities public investment is increased and companies were able to raise more

funds. The quoted companies with wide public interest have enjoyed some benefits and

assets valuation has become easier for tax and other purposes

Stock Broker

Investor requires a Stock Broker to buy and sell shares in stock exchanges (BSE, NSE

etc.). Stock Broker is registered member of stock exchange. A stock broker can register to

one or more stock exchanges.


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Only stock brokers can directly buy and sell shares in Stock Market. An investor must

contact a stock broker to trade stocks. Broker charge commissions (brokerages) for their

service. Brokerage is usually a percent of total amount of trade and varies from broker to

broker.

Stock Trading

Traditionally stock trading is done through stock brokers, personally or through

telephones. As number of people trading in stock market increase enormously in last few

years, some issues like location constrains, busy phone lines, miss communication etc start

growing in stock broker offices. Information technology (Stock Market Software) helps

stock brokers in solving these problems with Online Stock Trading.

Online Stock Market Trading is an internet based stock trading facility. Investor can

trade shares through a website without any manual intervention from Stock Broker.

In this case these Online Stock Trading companies are stock broker for the investor.

They are registered with one or more Stock Exchanges. Mostly Online Trading Websites in

India trades in BSE and NSE.

There are two different type of trading environments available for online equity

trading.Installable software based Stock Trading Terminals.These trading environments

require software to be installed on investors computer. This software is provided by the

stock broker. This softwares require high speed internet connection. These kind of trading

terminals are used by high volume intraday equity traders.

Below is the detail comparison of major Online Stock Market Trading websites in

India. This comparison is to help investor to take calculated decision while searching for

new trading portal.

ICICI Direct Share khan India bulls 5Paisa Motilal Oswal Securities HDFC Securities Reliance Money IDBI Paisa Builder Kotak Securities


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HSBC Invest Direct

BOMBAY STOCK EXCHANGE (BSE):

This stock exchange, Mumbai, popularly known as BSE was established in 1857 as

The Native share and stock brokers association as a voluntary non-profit making

associations. It has an evolved over the years into its present status as the premier stock

exchange in the country. It may be not that the stock exchanges the oldest one in Asia,

even than the Tokyo Stock Exchange, which was founded in 1878.

The exchange, while providing an efficient and transparent market for trading in

securities, upholds the interests of the investors and ensures of their grievances, whether

against the companies or its own member brokers. It also strives to educate and enlighten

the investors by making available necessary informative inputs and conducting investors

education programmers.

A governing board comprising of 9 elected directors 2 SEBI nominees, 7 public

representative and executive directors, 2 SEBI nominees, 7 public representative and

executive director is the apex body, which decides the policies and regulates the affairs of

the exchange.

The executive director as the chief executive officer is responsible for the day to day

administration of the exchange. The average daily turnover of the exchange during the year

2000-01 (April March) was`. 3.984.16 crores and average number of daily trades`. 5.69

Lakhs.

The Ban on all deferral products like BLESS AND ALBM in the Indian capital Markets

by SEBI with effect from 2001, abolition period settlements and introduction of compulsory

ruling settlements in all scripts traded on the exchanges with effect from December 31,

2001 etc, have adversely impacted the liquidity and consequently there is a considerable

decline in the daily turnover at the exchange. The average daily turnover of the exchange

present scenario is 110363 (Lakhs) and number of average daily trade 1057 (Lakhs).

BSE INDICES:

In order to enable the market participants, etc., to track the various ups and downs

in the Indian stock market, the exchange have introduced in 1986 and equity stock index

called BSE SENSEX that subsequent became the barometer if the moments of the share

prices in the Indian stock market. It is a Market capitalization weighted index of 30


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companies. The base year of Sensex is 1978-79 .The Sensex is widely reported in both

domestic and international market through print as well as electronic media.

Sensex is calculated using a market capitalization weighted method. As per this

methodology, the level of the index reflects the total market value of all 3 componentstocks from different industries related to particular base period. The total market value of

the company is determined by multiplying the price of its stock by the number of shares

outstanding. Statisticians call an index of a set of combined variables (such as price and

number of shares) a composite index. It is much easier to graph a chart based on indexed

values than one based on actual values worked over majority of the well-known indices are

constructed using Market capitalization weighted method.

In practice, the daily calculation of SENSEX is done by dividing the aggregate marketvalue of the 30 companies in the index by a number called the index Devisor. The devisor is

the only link to the original base period value of the sensex.

The divisor keeps the index comparable over a period of time and if the reference

point for the entire index maintains adjustments. SENSEX is widely used to describe the

mood in the Indian Stock Markets.

Base year average is changed as per the formula new base year average =old base

year average*(new market value/old market value).

NATIONAL STOCK EXCHANGE (NSE):

The NSE was incorporated in November 1992 with an equity capital of `. 25 crores.

The International Securities Consultancy (ICS) of Hong Kong has helped in setting up NSE.

ISE has prepared detailed business plans and installation of hardware and software

systems. The promotions for NSE were financial institutions, insurances companies, banks

and SEBI Capital Market Ltd.

It has been set up to strengthen the move towards professionalizing of the capital market

was well as provide nationwide securities facilities to investors.

NSE is not an exchange in the traditional sense where brokers own and manage the

exchange. A two tier administrative set up involving a company board and a governing

board envisaged.

NSE is a national market for shares PSU bonds, debentures and government securities since

infrastructure and trading facilities are provided.


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NSEMIDCAP INDEX:

The NSEmidcap index or the junior Nifty comprises 50 that represents 21 abroad

industry groups and will provide proper representation of the midcap segment of the Indian

Capital Market. All stocks in the index should have market capitalization of greater than `.

200 crores and should have traded 85% of the trading says at the impact cost less 2.5%

The base period for the index is November 4th

, 1996, which signifies two years for

completion of operation of the capital market segment of the operations. The base value of

the index has been set at 1000. At present there are 24 stock exchanges recognized under

the securities contract (regulations) Act, 1956. They are:


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Members of the stock exchange:

The securities contract regulation act 1956 has provided uniform regulation for the

admission of members in the stock exchanges. The qualifications for becoming a member of a

recognized stock exchange are given below:

o The minimum age prescribed for the members is 21 years.o He should be an Indian citizen.o He should be neither a bankrupt nor compound with the creditors.o He should not be convicted for fraud or dishonesty.o He should not be engaged in any other business connected with a company.o He should not be a defaulter of any other stock exchange.o The minimum required education is a pass in 12th standard examination.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The securities and exchange board of India was constituted in 1988 under a

resolution of government of India. It was later made statutory body by the SEBI act

1992.according to this act, the SEBI shall constitute of a chairman and four other

members appointed by the central government.

With the coming into effect of the securities and exchange board of India act,

1992 some of the powers and functions exercised by the central government, in respect of

the regulation of stock exchange were transferred to the SEBI.

OBJECTIVES AND FUNCTIONS OF SEBI

a. To protect the interest of investors in securities.b. Regulating the business in stock exchanges and any other securities market.c. Registering and regulating the working of intermediaries associated

with securities market as well as working of mutual funds.

d. Promoting and regulating self-regulatory organizations.e. Prohibiting insider trading in securities.


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f. Regulating substantial acquisition of shares and takeover of companies.g. Performing such functions and exercising such powers under the

provisions of capital issues (control) act, 1947and the securities to it by

the central government.

SEBI GUIDELINES TO SECONDARY MARKETS: (STOCK EXCHANGES)

1. Board of Directors of Stock Exchange has to be reconstituted so as to includenon-members, public representatives and government representatives to the

extent of 50% of total number of members.

2. Capital adequacy norms have been laid down for the members of various stockexchanges depending upon their turnover of trade and other factors.

3. All recognized stock exchanges will have to inform about transactions within 24hrs.ROLLING SETTLEMENT SYSTEM:

Under rolling settlement system, the settlement takes place n days (usually 1, 2, 3 or

5days) after the trading day. The shares bought and sold are paid in for n days after the

trading day of the particular transaction. Share settlement is likely to be completed

much sooner after the transaction than under the fixed settlement system.

The rolling settlement system is noted by T+N i.e. the settlement period is n

days after the trading day. A rolling period which offers a large number of days negates

the advantages of the system. Generally longer settlement periods are shortened gradually.

SEBI made RS compulsory for trading in 10 securities selected on the basis of the

criteria that they were in compulsory demat list and had daily turnover of about Rs.1crore

or more. Then it was extended to A stocks in Modified Carry Forward Scheme,

Automated Lending and Borrowing Mechanism (ALBM) and Borrowing and lending

Securities Scheme (BELSS) with effect from Dec 31, 2001.

SEBI has introduced T+5 rolling settlement in equity market from July 2001 and

subsequently shortened the cycle to T+3 from April 2002. After the T+3 rolling

settlement experience it was further reduced to T+2 to reduce the risk in the market and

to protect the interest of the investors from 1st April 2003.

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3 Chapter 3 Industry Profile