44117927 Project Study of Stock Exchanges

Short Project

On

Study of stock exchange in India

Presented By:

Merwin Arun Alva

Study of stock exchange In India– Merwin Alva

*Index of content *

I. Introduction

II. Review of literature.

1. The Importance of Stock Exchanges

2. Stock Trading.

Stock Specialists and the Exchange Floor

Floor brokers.

Institutional brokers.

3. Trading in other securities.

Bonds.

Options.

Futures.

4. Stock Exchanges in India.

5. Evolution of Stock Exchanges in India.

6. Study of Indian Market.

Sensex Milestones.

Sensex Falls.

7. NCAER--SEBI [Survey of Indian Investors]

III. Objective of study

IV. Scope of study.


{I}INTRODUCTION:

Stock Exchange organized market for buying and selling financial instruments, including stocks, options, and futures. Most stock exchanges have specific locations where commissioned, or paid, intermediaries called brokers conduct trading that is, buying and selling. Stocks are not always traded on a stock exchange. Some are traded over the counter, without a specific central trading location. Stocks are shares of ownership in companies.

Major stock exchanges in the United States include the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), both in New York City. A major stock exchange in India is Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). In addition, most of the world’s industrialized nations have stock exchanges. Among the larger International Exchanges are those in London, England, Paris, France, Milan, Italy, Hong Kong, China, and Tokyo, Japan.

Main financial products/instruments dealt in the secondary market

• Equity: The ownership interest in a company of holders of its common and Preferred stock. The various kinds of equity shares are as follows –

Equity Shares:• An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.

• Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held.

• Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

• Preferred Stock/ Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders.

• Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to bepaid out before paying dividend on equity shares.

• Cumulative Convertible Preference Shares: A type of preference shareswhere the dividend payable on the same accumulates, if not paid. After aspecified date, these shares will be converted into equity capital of the company.

• Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.


• Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.

• Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (upto twenty years).

• Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/ charged against the asset of the company in favour of debenture holder.

• Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan.The various types of Bonds are as follows-

• Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

• Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

• Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.

• Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.

The stock exchanges dealers has a great importance while understanding the stock market they are as follows:-

1) BEAR – A Bear is a dealer on stock exchange, currency or commodity market, who expects prices to FALL. A bear market is one in which a dealer is more likely to sell securities, currency or establishing a bear position. The bear hopes to close (or cover) such a short position by buying in at a lower price the securities, currency or goods already sold. The difference between the purchase price and the original sale price represents the successful bear’s profit. A concerted attempt to forces prices down by a powerful bear (or a group of them) by resorting to sustained selling is called a BEAR RAID.

2) BULL – A Bull is a dealer on a stock exchange, currency or a commodity market, who expects prices to RISE. A bull market is one in which a dealer is more likely to be a buyer than a seller, even to the extent of Study of stock exchange In India– Merwin Alva

buying for his or her account and establishing a bull position. A bull position hopes to sell the purchases at a higher price after the market has risen. A bull position or long position occurs when the bull owns securities

3) JOBBER –A jobber is an independent dealer in securities. He purchases and sells securities in his own name. He is not allowed to deal with non- members directly.

4) CHICKEN –Chickens are afraid to lose anything .Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets altogether. While it’s true that you should never invest in something over which you lose your sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk.

5) PIG –Pigs are high risk investors looking for the one ‘BIG’ score in a short period of time. Pigs buy on hot tips and invest in companies in companies without doing their due diligence. Pigs get impatient, greedy, and emotional about their investment, and they are drawn to high-risk securities without putting proper time or money to learn about these investment vehicles. Professional traders love pigs, as it is often from their losses that the bulls and bears reap their profits.

6) STAG –A stag is a speculator who buys a large amount of shares in a new issue of shares (like an IPO- Initial Public Offer)if he thinks the price is likely to rise above the offer price when trading in the scrip begins on the stock exchange . A stag indulges in this kind of speculation with the hope to sell soon at profit.

Stock Certificate from the 19th CenturyThis photo shows a stock certificate issued in 1863 by the Octoroon Gold and Silver Mining Company of Nevada. The certificate indicates that its bearer owns 1000 shares of stock in the company, each valued at $100.


{II} Review of literature.

{1}The Importance of Stock Exchanges

Stock exchanges serve important roles in national economies. They encourage investment by providing places for buyers and sellers to trade securities, stocks, bonds, and other financial instruments. Companies issue stocks and bonds to obtain capital to expand their business.

Corporations issue new securities in the primary market (as opposed to the secondary market, where securities are bought and sold), usually with the help of investment bankers. In the primary market, corporations receive the proceeds of stock sales. Thereafter, they are not involved in the trading of stocks. Owners of stocks trade them on a stock exchange in the secondary market.

In the secondary market, investors, not companies, earn the profits or bear the losses resulting from their trades. Stock exchanges encourage investment by providing this secondary market. By allowing investors to sell securities, exchanges increase the safety of investing.

Stock exchanges also encourage investment in other ways. They protect investors by upholding rules and regulations that ensure buyers will be treated fairly and receive exactly what they pay for. Exchanges also support state-of-the-art technology and the business of brokering, which both help traders to buy and sell securities quickly and efficiently.

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{2} Stock Trading

Stocks are shares of ownership in companies. People who buy a company’s stock are entitled to dividends, or shares of any profits. A company can list its stock on only one major stock exchange, though options on its stock may be traded on another. Each exchange establishes requirements that a company must meet to have its stock listed. The different exchanges tend to attract different kinds of companies. Smaller exchanges typically trade the stock of small, emerging businesses, such as high-tech companies. In the United States, the AMEX lists small- to medium-sized businesses, including many oil and gas companies. The NYSE primarily lists large, established companies.

Stock brokers must be registered with the exchange in which they trade. Most brokers belong to brokerage firms. Brokerage firms maintain staffs of many brokers, each of whom has experience in the trading of securities of certain companies or those of particular economic sectors, high tech, utilities, or transportation businesses, for instance. Brokerage firms also tend to trade in the stocks of specific companies, and therefore keep inventories of the stocks of those companies. To become a member of an exchange, a firm must register its brokers by buying seats for them. A seat is simply a right to trade on an exchange. Member firms have the right to vote on exchange policy and must also arbitrate in disputes among customers. In larger exchanges, seats may sell for several hundreds of thousands of dollars. Exchanges attract larger or smaller brokerage firms depending on how high or low their fees are.Study of stock exchange In India– Merwin Alva

Brokerage firms that pay high membership fees to exchanges like the NYSE have the opportunity to make large profits trading in the stock of very successful businesses. They also risk losing large amounts, and therefore charge their clients higher prices than do smaller firms. In part, large companies use large brokerage firms and list on large exchanges because of the potential losses possible to those trading their securities.

{A}Stock Specialists and the Exchange Floor

At a stock exchange, certain brokers specialize in trading certain stocks. These specialists operate on the floor of the exchange, the area where all trading takes place. The floor of the NYSE, for example, is an enormous room that measures about 30 by 56 by 24 m high (about 100 by 183 by 79 ft high). Brokers pack the floor during trading. They often use bargaining and negotiation to execute larger trades, and they take bids for the highest prices. The process is noisy and frantic, and brokers use hand signals to communicate above the chaos. In U.S. exchanges, only trades over 1200 shares are negotiated on the floor. In smaller trades, orders commonly go to specialist brokers directly via computer.

The process is noisy and frantic, and brokers use hand signals to communicate above the chaos.

Specialists sometimes act as dealers—instead of as intermediaries, or brokers—trading directly in the stocks of their firms’ accounts. For this reason, they are also known as broker-dealers. They do this when market trends favour the trading of certain stocks and investors have not ordered enough trades to clear the market, or balance supply and demand. Floor traders always trade only in stocks owned by their brokerage firms and never act as intermediaries.

{B} Floor Brokers

Other brokers, called floor brokers (not the same as floor traders), do not act as specialists. They instead handle large orders to buy or sell stocks of specific companies. Clients place such orders with brokerage firms, who then contact their floor brokers. After receiving orders, floor brokers take them to specialists to arrange the trades. Floor and specialist brokers negotiate trades as representatives of clients and companies. In smaller trades, orders commonly go directly to specialist brokers via computer.

{C} Institutional Brokers

Institutional brokers specialize in bulk purchases of securities, including bonds, for institutional investors. Institutional brokers generally charge their clients a lower fee per unit than do brokers who trade for individual investors.


{3} TRADING IN OTHER SECURITIES

{A} Bonds

Bonds provide a way for companies to borrow money. People who invest in bonds are lending money to a company in return for yearly interest payments. Bonds are traded separately from stocks on exchanges. Most bonds are bought in large quantities by institutional investors—large investors such as banks, pension funds, or mutual funds.

{B} Options

Options are traded on many U.S. stock exchanges, as well as over the counter. Options writers offer investors the rights to buy or sell—at fixed prices and over fixed time periods—specified numbers of shares or amounts of financial or real assets. Writers give call options to people who want options to buy. A call option is the right to buy shares or amounts at a fixed price, within a fixed time span. Conversely, writers give put options to people who want options to sell. A put option is the right to sell shares or amounts at a fixed price, within a fixed time span. Buyers may or may not opt to buy, or sellers to sell and they may profit or lose on their transactions, depending on how the market moves. In any case, options traders must pay premiums to writers for making contracts. Traders must also pay commissions to brokers for buying and selling stocks on exchanges. Options trading are also handled by options clearing corporations, which are owned by exchanges. Option (finance).

{C} Futures

Futures contracts are also traded on certain U.S. exchanges, most of which deal in commodities such as foods or textiles. Futures trading works somewhat like options trading, but buyers and sellers instead agree to sales or purchases at fixed prices on fixed dates. After contracts are made, the choice to buy or sell is not optional. Futures contracts are then traded on the exchanges. Commodities brokers handle this trading. Futures and options traders often judge markets trends by monitoring compiled indexes and averages of stocks, usually organized by industry or market ranking. Among the most closely watched U.S. indexes are the Dow Jones Averages and Standard & Poor’s Future.

American Stock Exchange: The American Stock Exchange is one of the principal exchange houses in the United States. Founded in 1908, it was originally called the New York Curb Agency because of its origins on the streets of New York City. It was renamed in 1953.


{4}THE STOCK EXCHANGES IN INDIA

1. Ahmedabad Stock Exchange Association Ltd – AHMEDABAD, GUJRAT : - The Stock Exchange - Ahmedabad is the second oldest exchange of India. It was constituted in the year 1894 as a Public Charitable Trust. Ahmedabad Stock Exchange (ASE) started under a banyan tree and there from progressed year after year. It holds a unique place in India. Ahmedabad Stock Exchange got the permanent recognition from the Government of India in 1982. The era of 80s and 90s saw some major focus in the exchange. A proper infrastructure was build up and the exchange was completely computerised. The exchange went live on screen based trading on December 12, 1996. Currently there are 333 trading members in the exchange to serve the investors with one of the best transparent trading system in India. The trading of approximately 2000


nationally listed equities is done in the exchange. Over 200 high growth companies listed in the ASE or with other exchanges are also traded here.

2. Bangalore Stock Exchange – BANGALORE, KARNATAKA : - Bangalore Stock Exchange (BgSE) started functioning from 1963 and it is currently the largest stock exchange in South India. There are 595 listed companies with more than 300 non-regional companies in it. Over 5000 companies from listed and permitted category can be traded at the exchange at present. Bangalore Stock Exchange is managed by the Council of Management which consists of members being nominated by SEBI, public representatives, elected members and Executive Director. At present the exchange has about 239 members. 25% of the total is corporate members.

3. Bhubaneswar Stock Exchange Association- BHUBANESWAR, ORRISA:- Bhubaneshwar Stock Exchange Association Ltd. (BhSE) came into existence in the year 1989. It has been registered under the Companies Act, 1956 as a company limited by guarantee. By 1999-2000, the exchange had a total of 234 brokers, out of which 15 were corporate brokers. Among 234 brokers, it was further classified as 209 proprietors and 15 corporate brokers. Then, there were only 17 sub-brokers registered. On 15th September, 2005, SEBI approved the corporatisation and demutualisation schemes of the Bhubaneshwar Stock Exchange which were required in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956.

4. Calcutta Stock Exchange – KOLKATA, WEST BENGAL :- Calcutta Stock Exchange (CSE) started way back in 1830 under a "Neem Tree." Today CSE has emerged as the second largest bourse in India. In May 1908, the group formed an association and named it as we know it today at 2, China Bazaar Street. The Association was registered as a limited liability concern on June 7, 1923 with an authorized capital of Rs. 3 lakhs duly divided into 300 shares of Rs. 1,000 each. The shares were further subdivided into 4 shares of Rs. 250 each in the year 1959. CSE was incorporated in the year 1908 with 150 members. At present, the membership has reached above 900 with several corporate and institutional members. More than 3,500 companies have been listed to the exchange. With effect from April 14, 1980, CSE was granted permanent recognition by the Central Government under the relevant provisions of the Securities Contracts (Regulation) Act, 1956.

5. Cochin Stock Exchange Ltd- KOCHI, KERALA : - Cochin Stock Exchange (CSE) is counted among one of the premier Stock Exchanges in India. It was established in 1978 and had undergone tremendous transformation over the years. In 1978, it had only 5 companies listed and had only 14 members. Currently, it has 508 members and 240 listed companies. Cochin Stock Exchange went for computerization of its offices in 1989. To keep pace with the market, it took various initiatives; one such initiative was trading dematerialised shares. It introduced the facility of computerised trading known as "Cochin Online Trading" (COLT) on March 17, 1997. It also became one of the promoters of the Interconnected Stock Exchange of India (ISE). The basic idea of ISE was to consolidate the smaller and fragmented markets which are less liquid into a national level integrated liquid market.

6. Coimbatore Stock Exchange – COIMBATORE, TAMIL NADU:- Coimbatore Stock Exchange Limited (CSX) is the youngest stock exchange in India. It was founded by K.G. Balakrishnan. It is now governed by


the Governing Body which consists of the member brokers. Currently the staff strength is fifty. The exchanges also have Screen Based Trading (SBT) system which commenced operations on 9th of October, 1996. The system is equipped to handle 25,000 traders per day and 400 members. Each member has been given a computer terminal which is connected in a Local Area Network (LAN).

7. Delhi Stock Exchange Association – NEW DELHI : - The Delhi stock Exchange Association Limited (DSE) was incorporated on June 25, 1947. The exchange is an amalgamation of Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited. It is India's fifth exchange. The exchange is one of the premiers Stock Exchange in India. The Delhi Stock Exchange is well connected to 50 cities with terminals in North India. The exchange is having over 3,000 listed companies. It has received the market regulator's permission from BSE and has become its member. Now it facilitates the DSE members to trade on the BSE terminals. The exchange is also considering the same from NSE.

8. Guwahati Stock Exchange Ltd- GUWAHATI, ASSAM : - The Guwahati (Gauhati) Stock Exchange (GSE) was incorporated on 29th of November, 1983 and it was recognised by the Government of India on 1st of May, 1984. The GSE is limited by guarantee by the member-brokers.By 1999-2000, the exchange had a total of 206 brokers, out of which 5 were corporate brokers. Among 206 brokers, it was further classified as 200 proprietor brokers, 1 partnership broker and 5 corporate brokers. Then, there was only 4 sub-brokers registered. Currently there are 290 companies listed in the GSE.

9. Hyderabad Stock Exchange Ltd – HYDERADAB, ANDRA PRADESH :- The Hyderabad Stock Exchange Limited (HSEL) was established on the year 1944. It was registered under the Companies Act, 1956 as a company limited by guarantee. By 1999-2000, the exchange had a total of 310 brokers, out of which 102 were corporate brokers. Among 310 brokers, it was further classified as 202 proprietor brokers, 6 partnership brokers and 102 corporate brokers. Then, there was only 198 sub-brokers registered. According to the provision of the Securities Contracts (Regulation) Act, it is now corporatized and de-mutualised. SEBI has approved the scheme in September, 2005.Among other things, the scheme provides for the re-registration of the exchange as a company limited by, the segregation of ownership and management from the trading rights of members, restrictions on voting right of shareholders who are also trading member, composition of the Governing Board, etc

10. Jaipur Stock Exchange Ltd- JAIPUR, RAJASTHAN : -Jaipur Stock Exchange is the third largest exchange in India in terms of membership. It was established in the year 1989. In the same year, the exchange was granted recognition in the month of January and the commencement of business took place from the month August, 1989. Within seven years of its incorporation, i.e. by January'96, the exchange managed to attract 750 companies who were listed on the exchange. Then the volume of the daily turnover rose to an average of Rs.80 million.Jaipur Stock Exchange was one of the 15 regional Stock Exchanges which promoted the Inter-connected Stock Exchange of India Ltd. by paying the Initial Capital of Rs.1crore (Rs.5lakhs as admission fee and Rs.95lakhs as infrastructure fee).

11. Ludhiana Stock Exchange Association Ltd – LUDHIAN, PUNJAB : -Ludhiana Stock Exchange Association Limited (LSE) was established in the year 1983. By 1999-2000, the exchange had a total of 284 brokers, out of which 79 were corporate brokers. Among 284 brokers, it was further classified as 212 proprietor brokers, 2 partnership brokers and 70 corporate brokers. Then, there were only 23 sub-brokers registered. Ludhiana


Stock Exchange became the second bourse in India to introduce modified carry forward system after BSE on April 6, 1998. On the same date, LSE also introduced a settlement guarantee fund (SGF). The SGF guarantees settlement of transactions and the carry forward facility provides liquidity to the market. LSE became the first in India to start LSE Securities Ltd., a 100% owned subsidiary of the exchange. The LSE Securities got the ticket as sub-broker of the NSE. In 1998, the exchange also got permission to start derivative trading. For the settlement of dematerialised securities, the Ludhiana Stock Exchange has also been linked up with National Securities Depository Ltd. (NSDL).

12. Madras Stock Exchange – MADRAS, CHENNAI : -The Madras Stock Exchange (MSE) has a history from 1920 when the exchange had 100 members. The boom period of the exchange faded out and the membership was reduced to only 3 by 1923. Good days returned back in September, 1937 and the exchange was once again organised as Madras Stock Exchange Association (Pvt.) Limited catered to mills and plantations in the area. In 1957, the name was again changed to Madras Stock Exchange Limited. On August 21, 1998, the exchange was approved with SGF Schemes by SEBI. With a pale shadow in the past. Madras Stock Exchange managed to have a turnover of Rs.109 crores in the year 2001.

13. Madhya Pradesh Stock Exchange Ltd-INDORE, MADYA PRADESH : -Madhya Pradesh Stock Exchange, set up as 'association of persons', is on the verge to get incorporated as a 'for-profit company limited' by the shares and demutualisation. With this, the ownership and management will be segregated from their trading rights. Then, there will only exist one class of trading members who will be enjoying similar rights and privileges. A uniform standard will be maintained in terms of the capital adequacy, deposits and fees for admitting any one as a trading member or for accepting his surrender. Voting rights of the shareholders, also trading members, will be limited to 5% and people who are not shareholders but having trading rights will hold minimum of 51% of equity stake of the corporatized and demutualised stock exchange.In 1999-2000, Madhya Pradesh Stock Exchange Ltd. (MPSE) had a total of 187 brokers, out of which 28 were corporate brokers. Among 187 brokers, it was further classified as 155 proprietor brokers, 4 partnership brokers and 28 corporate brokers then, there were only 5 sub-brokers registered.

14. Mangalore Stock Exchange Limited – MANALORE, KARNATAKA:- The Mangalore Stock Exchange (MgSE) was incorporated on 31st of July, 1984 as a public limited company. The company was granted recognition as a stock exchange on September 9, 1985 under section 4 of the Securities Contracts (Regulation) Act, 1956. On 28th September, 2001, Chief Minister S.M. Krishna laid the foundation stone of a new building of Mangalore Stock Exchange at Kulur. MgSE was granted three acres of land by the state government. The recognition of the Mangalore Stock Exchange was granted renewal from time to time since 1985. The last recognition was valid up to September 8, 2003. On August 31, 2004, SEBI decided to derecognise the Mangalore Stock Exchange.In case of de-recognition, the companies listed in the MgSE can consider seeking listing at other stock exchanges or can opt for exit option to the shareholders as per the Delisting Guidelines of SEBI. Upon de-recognition, the members or the shareholders of MgSE will cease to be members of any recognised stock exchange and therefore will be liable to be de-registered. Hence, their certificate of registration will stand automatically cancelled.

15. Meerut Stock Exchange Ltd- MEERUT, UTTAR PRADESH: -Meerut Stock Exchange is one of the well known Regional Stock Exchange in India. It has been registered under the Companies Act, 1956. The


exchange is modelled to provide a high level liquidity to its investors, to spread equity cult in the region, to impart capital market knowledge to all its intermediaries and to develop a winning team of professionals.

16. National Stock Exchange India – MUMBAI, MAHARASHTRA : -The National Stock Exchange of India (NSE) was incorporated in November 1992 as a tax-paying company. It is recognised under Securities Contracts (Regulation) Act, 1956 in 1993 as a stock exchange. In June 1994, it commenced operations in the Wholesale Debt Market (WDM). In November, the same year, the Capital Market (Equities) segment commenced operations and the Derivatives segment in June 2000.

17. OTC Exchange of India –MUMBAI, MAHARASHTRA : - Over-the-Country Exchange of India (OTCEI) was incorporated in the year 1990 as a Section 25 company under the Companies Act 1956. It is recognised by the Securities Contracts Regulation Act, 1956 as a stock exchange. The purpose of the formation of OTCEI was to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide transparent and efficient mode of trading to the investors.It is modelled along the lines of the NASDAQ market and has introduced several novel concepts to the Indian capital markets, like screen-based nationwide trading, sponsorship of companies, market making and scrip less trading. Presently the exchange has 115 listings and has helped in providing capital for enterprises which have walked on to build successful brands for themselves. They are VIP, Advent, Sonora Tiles & Brilliant mineral water, etc.

18. Pune Stock Exchange Ltd- PUNE, MAHASHTRA: -Pune Stock Exchange (PSE) was established on 2nd September, 1982 with only 35 members. It is a company limited by guarantee. Initially, the exchange had only a few lakh rupees business but now it is having Rs.15-20 crores of business daily with a member’s strength extended to 185. More than 310 companies are listed with Pune Stock Exchange. Based on VECTOR (Versatile Engine for Centralised Trading and On-line Reporting), the exchange is successfully using a screen based Trading System. At present it covers, 183 broker members and 9 workstations for the administration, Market Operations and Surveillance activities of the exchange.Pune Stock Exchange is looking for the possibilities of widening its activities to several parts of Pune city and other cities like Satara, Sangli, Solapur, Kolhapur, Ahmednagar, Aurangabad, Nasik and Mumbai.

19. Uttar Pradesh Stock Exchange Association – KANPUR, UTTAR PRADESH : -Uttar Pradesh Stock Exchange Association Ltd. was inaugurated on 27th August, 1982 and occupies one of the prominent places among the Stock Exchanges in India. It plays an important role in the development of the capital market of North India. Initially, it had only 350 members which have grown up to 540 at present. The membership is open to companies even beyond the territories of Uttar Pradesh.Currently, the exchange has 843 listed companies with a total capitalisation of Rs.81184 crores. The annual turnover of the exchange for three consecutive years are as follows:1998-99 : 18429 Crores1999-2000 : 23876 Crores2000-01 : 25112 Crores.

20. Vadodara Stock Exchange Ltd –VADODARA, GUJRAT : - Vadodara Stock Exchange Limited (VSE) was established in 1990 at Baroda. It is the third stock exchange in the state of Gujarat after Ahmedabad and Rajkot. By 1999-2000, the exchange had a total of 321 brokers, out of which 65 were corporate


brokers. Among 321 brokers, it was further classified as 253 proprietor brokers, 3 partnership brokers and 65 corporate brokers. Then, there were only 85 sub-brokers registered.

21. Bombay stock exchange – MUMBAI, MAHARASHTRA : -The BSE is the oldest stock exchange in Asia and largest number of listed companies in the world, with 4900 listed as of Feb 2010. It is located at Dalal Street, Mumbai, India. On Feb, 2010, the equity market capitalization of the companies listed on the BSE was US$1.28 trillion, making it the 4th largest stock exchange in Asia and the 11th largest in the world. With

over 4900 Indian companies listed & over 7700 scrip on the stock exchange, it has a significant trading volume. The BSE SENSEX, also called the "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for most of the trading in shares in India.


http://en.wikipedia.org/wiki/National_Stock_Exchange_of_India

http://en.wikipedia.org/wiki/Asia

http://en.wikipedia.org/wiki/BSE_Sensex

http://en.wikipedia.org/wiki/List_of_stock_exchanges

http://en.wikipedia.org/wiki/Asia

http://en.wikipedia.org/wiki/1000000000000_(number)

http://en.wikipedia.org/wiki/Market_capitalization

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Mumbai

http://en.wikipedia.org/wiki/Dalal_Street

http://en.wikipedia.org/wiki/Dalal_Street

http://en.wikipedia.org/wiki/Stock_exchange

{5}Evolution of Stock Exchanges in India

The origin of the stock market relates back to the year 1494, when the Amsterdam Stock Exchange was set up. In India it dates back to the 18th Century, an era when the East India Company was a dominant institution in India.

“The Bombay Stock Exchange”(BSE) was founded in the year 1875. “The Ahmedabad Shares and Stock Association” was formed in the year 1894. The Calcutta Stock Exchange Association was formed by about 150 brokers on 15th June 1908.

In the Year 1920, one stock exchange was established in Northern India and one in Madras Called “The Madras Stock Exchange”. “The Madras Stock Exchange Association Pvt. Ltd” was established in the year 1941. On 29th April, 1959, it was reorganized as a Company limited by guarantee under the name and style of “Madras Stock Exchange” (MSE). The Lahore Stock Exchange was formed in the year 1934. However, in the year 1936 after the Punjab Stock Exchange Ltd. Came into existence, the Lahore Stock Exchange merged with it. In Calcutta, a second Stock Exchange by name “The Bengal Share & Stock Exchange Ltd” was established in the year 1937 and likewise once again in the year 1938, Bombay also witnessed a rival Stock Exchange formed in the name of “Indian Stock Exchange Ltd.” The U.P.Stock Exchange was formed in Kanpur and the Nagpur Stock Exchange Ltd. In Nagpur in the year 1940. The Hyderabad Stock Exchange Ltd. Was incorporated in the year 1944. Two stock exchanges which came into being in Delhi by the name “The Delhi Stock & Share Brokers Association Ltd.” And “The Delhi Stocks & Shares Exchange Association Ltd.” Were amalgamated into “The Delhi Stock Exchange Association Ltd.” In the year 1947 subsequently, the Bangalore Stock Exchange was registered in the year 1957 and recognized in the year 1963. The Third Stock Exchange in the state of Gujarat the “Vadodara Stock Exchange Ltd.” Was incorporated in 1990. The Over the Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ (National Association of Securities Dealers Automated Quotation) of the USA was promoted and approved on August 1989.

The National Stock Exchange of India Ltd. Was incorporated in November, 1992.Today, there are 23 Stock Exchanges in India, including the 3 Stock Exchanges in Mumbai- Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI).

The Bombay Stock Exchange is the oldest Stock Exchange in Asia located in Dalal Street, Mumbai in India. The Bombay Stock Exchange was established in 1875 as The “Native Share and Stock Brokers Association” earned a formal status under the

Securities and Exchange Board of India (SEBI) in 1956. Market Capitalisation of BSE Was about Rs.33.4 trillion as on 2006, October. The Bombay Stock Exchange uses the Bombay Stock Exchange as the market index in Asia and India. The Bombay Stock Exchange deals with trading in derivatives, equity and other debt Instruments.

Derivatives Market


The Bombay Stock Exchange introduces the first Exchange Traded Index Derivative Contract in 2000, the Index Option be traded from 2001 whereas the single stock futures were traded from 2002. The weekly options were introduced. Index Futures: Index futures are basically futures whose underlying asset is the BSE index itself.

Index options:

The index options like any other option gives the holder, the right but not the obligation to buy or sell the underlying asset at a specified date and price. Then underlying asset in the case of the index option is again the BSE index itself.

Stock Futures and Options

Stock Futures and the stock options have the normal characteristics as any other stock future or option traded by them where the underlying asset is some stock. Equity Futures and Options: The Bombay Stock Exchange also introduced the Equity Futures and Options.

Leaving aside the BSE Sensex there are many other indices that are used by the Bombay Stock Exchange and they are as follows:

BSE 500 BSE 100 BSE 200 BSE PSU BSE MIDCAP BSE SMLCAP BSE BANKEX BSE Tech BSE Auto BSE Pharma

The securities market has essentially three categories of participants, viz., the issuer of Securities, the investors in the securities and the intermediaries. The issuers are the Borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their saving by subscribing to these securities. The intermediaries’ are the agents who match the needs of users and suppliers of funds for a commission.

These intermediaries perform functions to help both the issuers and investors to achieve their respective goals. This process of mobilizations of resources is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors.


Market Segments

The security has two interdependent and inseparable segments, the new issues (primary) and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The securities issued in the primary market are issued by public limited companies or by government agencies. The resources in this kind of market are mobilized either through the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities (dated securities and treasury bills).

The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once the new securities are issued in the primary market they are traded in the stock (secondary) market. The secondary market operated through two mediums, namely, the over-the-Counter (OTC) market and the exchange-traded market. OTC markets are informal Markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC Market. The other option is to trade using the infrastructure provided by the stock Exchanges. There are 23 exchanges in India and all of them follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities, including government securities. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities.

International Scenario

Following the implementation of reforms in the securities industry during the last decade, Indian stock markets. As may be seen out in the world ranking as well as in the Developed and emerging markets. India has a turnover ratio of 94.2%, which is quite Comparable to the other developed market like the US and UK which has turnover ratios of 129.1% and 141.9% respectively. As per Standard and Poor’s Fact book India ranked 17th in terms of market capitalization (18th in 2004) and 18th in terms of total value traded in stock exchanges and 20th terms of turnover ratio as on December 2005. During the year 2007-08, NSE reported a turnover of Rs.3, 551,038 crores in the equities segment. 199 companies have used the on-line IPO system of NSE by the end of March 2007.


http://www.nseindia.com/content/equities/eq_busgrow2007-08.htm

A comparative study of concentration of market indices and indices stocks in Different world markets are presented in the table below. It is seen that the index stocks’ Share of total market capitalization in India is 77.9% whereas US index accounted for 92.7%.The ten largest index stocks of total market capitalization is 33.9% in India and 13.9% in case of US.

Index:

The stock markets worldwide have grown in size as well as depth over the last one Decade. As can be observed from Table 1-3, the turnover on all markets taken together though have grown from US $ 29.70 trillion in 2003 to $47.32 trillion in 2005. It is significant to note that US alone accounted for about 45.46% of worldwide turnover in 2005. Despite having a large number of companies listed on its exchanges, India Accounted for a merger 0.94% in total world turnover in 2005.The market capitalization of all listed companies taken together on all markets stood at US $ 43.64 trillion in 2005 ($38.90 trillion in 2004). The share of US in worldwide market capitalization decreased From 41.96% as at end-2004 to 38.95% in end-2005, while Indian listed companies

Accounted for 1.27% of total market capitalization in 2005There has also been an increase in market capitalization as per cent of GDP in some of

The major country groups as is evident from Table 1-4. The increase, however, has not been uniform across countries. The market capitalization as percent of GDP was the Highest at 108.9% for the high income countries as at end-2004 and lowest for middle Income countries at 43.7%. Market capitalization as percent for GDP in India stood at 56.1% as at end-2004. The turnover ratio, which is a measure of liquidity, however was approximately same for both the high-income countries and low-income countries 14% and 107.6% respectively. The total number of listed companies stood at 28,001 for high-Income countries, 14,117 for middle income countries as at end-2005.


{6}STUDY OF INDIAN MARKET .

The Bombay Stock Exchange is the largest of India’s more than 20 stock exchanges. Founded in 1875, it is the oldest stock exchange in Asia

T HERE ARE TWO TYPES OF MARKETS IN INDIA

1) MONEY MARKET Money market is a market for debt securities that pay off in the short term usually less Than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of Deposits, etc. In other word we can also say that the Money Market is basically concerned with the Issue and trading of securities with short term maturities or quasi-money instruments. The Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such Instruments of short-term maturities (i.e. not exceeding 1 year with regard to the Original maturity)

2) CAPITAL MARKET Capital market is a market for long-term debt and equity shares. In this market, the Capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets as stock exchanges.


Capital market can be divided into Primary and Secondary Markets.

i) PRIMARY MARKETIn the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. In addition to the traditional sources of capital from family and friends, start-up firms are created and nurtured by Venture Capital Funds and Private Equity Funds. According to the Indian Venture Capital Association Yearbook (2003), investments of $881 Million were injected into 80 companies in 2002, and investments of $470 million were injected into 56 companies in 2003. The firms which received these investments were drawn from a wide range of industries, including finance, consumer goods and health. Projects, Thesis, Dissertation The growth of the venture capital and private equity mechanisms in India is critically linked to their track record for successful exits. Investments by these funds only Commenced in recent years and we are seeing a rapid build up in a full range of channels for exit, with a mix of profitable and unprofitable outcomes. This success with exit suggests that investors will allocate increased resources to venture funds and private equity funds operating in India, who will (in turn) be able to fund the creation of new firms.

ii) SECONDARY MARKETSecondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, And aggregating information (via price discovery) that guides management decisions.

Difference between the primary market and the secondary marketIn the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

Sensex milestones


Here is a timeline on the rise of the Sensex through Indian stock market history.

1000- July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.

2000- January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh.

3000- February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by Dr Manmohan Singh.

4000- March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

5000- October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as the Bharatiya Janata Party-led coalition won the majority in the 13th Lok Sabha election.

6000, February 11, 2000 - On February 11, 2000, the information technology boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 21, 2005 - On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrip’s of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time.

8000- September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index – the Sensex - crossed the 8000 level following brisk buying by foreign and domestic funds in early trading.

9000- December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors.

10,000- February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10,000- mark on February 7, 2006.

11,000- March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on 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 12,000 and touched a peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first time.

13,000- October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the first time. It touched a peak of 13,039.36 and finally closed at 13,024.26.

14000- December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000. 15,000- July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 marks. 16,000- September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000 mark. 17,000- September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000 mark for the first time. 18,000- October 9, 2007 - The Sensex on October 9, 2007 crossed the 18,000 mark for the first time. 19,000- October 15, 2007 - The Sensex on October 15, 2007 crossed the 19,000 mark for the first time. 20,000- October 29, 2007 - The Sensex on October 29, 2007 crossed the 20,000 mark for the first time. 21,000- Jan 08, 2008 - The Sensex on January 8, 2008 touched all time peak of 21078 before closing at

20873.

We have seen Sensex Milestones in above case, which is also known as Upper Circuit of Stock Market. Let’s study what is Upper Circuit in Stock Exchange?

Upper circuit is a system to curb excessive speculation in the stock market, applied by the stock exchange authorities, when the index spurts or plunges by more than a fixed limit. Trading is then suspended for some time to let the market cool down.


The market wide circuit breakers would be triggered by movement of either Sensex or the NSE S&P CNX Nifty whichever is breached earlier.

In case of a 10% movement of either of these indices, there would be a 1-hour market halt if the movement takes place before 1 p.m. In case the movement takes place at or after 1 p.m. but before 2.30 p.m. there will be a trading halt for 1½ hour. In case the movement takes place at or after 2.30 p.m. there will be no trading halt at the 10% level and the market will continue trading.

In case of a 15% movement of either index, there will be a 2-hour market halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1 p.m. but before 2 p.m., there will be a 1 hour halt. If the 15% trigger is reached on or after 2 p.m. the trading will halt for the remainder of the day.

In case of a 20% movement of the index, the trading will be halted for the remainder of the day.

Sensex falls

Some major single-day falls of the Sensex have occurred on the following dates;

January 21, 2008 --- 1,408.35 points. Oct 24, 2008---1070.63 points March 17, 2008 --- 951.03 points July 6, 2009 --- 870 points January 22, 2008 --- 857 points February 11, 2008 --- 833.98 points May 18, 2006 --- 826 points October 10, 2008 --- 800.10 points March 13, 2008 --- 770.63 points December 17, 2007 --- 769.48 points January 7, 2009 --- 749.05 points March 31, 2007 --- 726.85 points October 6, 2008 --- 724.62 points October 17, 2007 --- 717.43 points September 15, 2008 --- 710.00 points January 18, 2007 --- 687.82 points November 21, 2007 --- 678.18 points August 16, 2007 --- 642.70 points August 17, 2009 --- 626.71 points June 27, 2008 --- 600.00 points.

Let’s also study what is lower circuit?

The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.

In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for Â½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading.


In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day.

In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

These percentages are translated into absolute points of index variations on a quarterly basis. At the end of each quarter, these absolute points of index variations are revised for the applicability for the next quarter. The absolute points are calculated based on closing level of index on the last day of the trading in a quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty.Although introduced in November 1992, it was used for the first time in the Bombay Stock Exchange on Tuesday, 9 March 1993 when the Sensex declined by more than 5% from the opening level, i.e. from 2451.20 to 2318.26. At that time, the circuit was 5%.

The both the ratio of upper circuit & lower Circuit are the same.

NCAER--SEBI "Survey of Indian Investors"


An NCAER--SEBI "Survey of Indian Investors" of June 2000 reported that only 7.4 per cent of Indian households invested in equity or debenture securities, either directly or through mutual funds.

The comparable number for the UK was 23 per cent, Canada 46 per cent, Germany 18 per cent, France 48 per cent, South Korea 8 per cent, Australia 50 per cent, and the US about 48 per cent. The survey also revealed that excluding investments perceived as risk-free (e.g. NSC, LIC policies) Indian households rank the following four categories in a descending order of risk preference:

(1) Bank deposits,

(2) Gold,

(3) UTI and other mutual funds,

(4) Stocks, company deposits, debentures, and chit funds.

Indian brokerages, corporate, market analysts and others have been known to use the media to spread misinformation. In most cases, even if wrongdoing is established, it is almost impossible to make good the losses incurred by investors. As such, given the information asymmetries and recurring episodes of market manipulation, it is understandable that retail investors prefer to invest in public sector debt instruments. This lack of investor confidence results in significant opportunity costs. For example, stock market investment alternatives can promote savings incentives. In efficient markets, investors are able to readily convert their equity holdings into cash without affecting stock prices. This ease of exit attracts investors (both domestic and foreign) and enhances capital allocation efficiency (reducing the dependence on pure bank financing) and growth. Further, well-functioning equity markets can lead to a better monitoring of management performance and thereby improve corporate governance. What else can SEBI do to increase equity market depth and boost investor confidence? In most capital market regulators around the world, including the SEC in the US, more than half the staff is engaged in surveillance and legal functions. Comparatively, SEBI is inadequately staffed both in the number and strength of its surveillance and legal personnel. To use a military term, SEBI does not have an adequate 'teeth to tail' ratio.

The JPC and SEBI reports on stock market, mutual fund and other "scams" of the last ten years clearly indicate the complexity of linkages across brokerages, banks, finance companies, and domestic, overseas corporate bodies.

Consequently, surveillance staff needs to have an adequate "market" background and strong motivation. Further, SEBI's technical capabilities lag those of entities it is meant to regulate, e.g. stock exchanges and brokerages. SEBI also needs to anticipate market anomalies, promote innovation, and relentlessly pursue upgrading technology.

It is difficult for SEBI to attract the talent and doggedness required for its surveillance and market development responsibilities. Today, it is unlikely that graduates from prominent law or business schools would consider starting their careers in SEBI. However, motivated and talented professionals would join if they sense that they would acquire marketable skills by working in SEBI. Junior positions could be filled through a competitive entrance examination to build a professional cadre much in the same way as the RBI. By definition, the part-time SEBI board members from the ministry of finance, DCA and RBI cannot attend to SEBI's everyday responsibilities. It is in recognition of the pressures for SEBI to act in a timely and deterrent manner that the 2002 amendment of the SEBI Act increased the number of full-time board members, the regulator's investigative powers, and the penalties that can be imposed. SEBI badly needs its


complement of three full-time board members who are knowledgeable about capital markets, as prescribed in the amended Act.

It bears mentioning though that even in developed markets only a small fraction of infringements are successfully prosecuted. In out-of-court settlements, fines are usually paid without admission of guilt. Hence, even with better surveillance and effective legal follow-up it would be unrealistic to expect an immediately higher success rate in the prosecution of comparable infringements in India. Domestic and international private equity flows in India could be augmented by simplifying exit value calculations. In recent years annual private equity flows have been about 0.6 per cent of GDP for the UK and between 1 and 2 per cent for the US. If we are able to raise additional private equity capital of about 0.5 per cent of GDP, that would amount to approximately Rs 10,000 crores per annum.

Stock markets are poised to benefit from two factors:

(A) A relatively young population.

(B) Pension reforms.

Most studies indicate that returns on long-term investments in a well-diversified stock portfolio usually exceed those on fixed-income securities.

Therefore, long-term investments in equity should be attractive for the increasing number of young retail investors in middle-income groups. SEBI needs to ensure that the risk-return trade-offs of longer-term equity investments are well understood by younger investors. Similarly, as funded pension schemes become more accessible, this could boost investor interest in equity. To summarise, Indian equity markets have a considerable amount of catching up to do with the deeper and more liquid markets. Our efforts need to be focused on:

(a) Widening the base of the stock market, increasing liquidity and reducing transaction costs for an increasing number of stocks.

(b) Expanding the universe of traded instruments and upgrading technology.

(c) Raising retail investor Confidence by increasing the effectiveness of surveillance and increasing investor sophistication.

(d) Promoting greater self-regulation, transparency, disclosure and competition amongst broker-dealers and stock exchanges.


NCAER SURVEY ESTIMATES

Estimates of investor households and individual investors (direct ownership): An estimated 12.8 million, or nearly 8 percent, of all Indian households representing 19 million individuals had directly invested in equity shares or debentures or both as at the end of the financial year 1998-99.

Estimates of unit owning households and individual unit holders of mutual funds (indirect ownership): An estimated 15 million or nearly 9 per cent of all households have invested in units of mutual funds, many of which could be investor households. There is likely to be at least 23 million unit holders in mutual funds

More households own mutual funds than equity shares and debentures:

The number of households owning units of mutual funds is more than the investor households which have investments in shares and debentures. The existence of such large number of unit holders is a measure of the growth of mutual funds.

The number of equity investor households and equity investors far exceed debenture owning households and debenture holders: Of the 12.8 million investor households, 12.1 million, or 7 per cent of all households representing approximately 18 million individual investors, owned equity shares and only 3.7 million households, or 1 percent, representing about 5 million investors owned debentures. The bulk of the debenture owning households are also equity investor households.

Households hardly differ in their risk perception of equity shares and debentures: It is important for corporate to note that households have hardly differed in the risk perception of equity shares and debentures; this runs contrary to theory and expectations.

Ownership of equity shares and debentures by households and individuals on the rise: Comparison of estimates of investor households available from the Survey of Household Financial Assets (SOFA) conducted by NCAER at an all India level in December 1986, and the households have increased at a compounded growth rate of 22 percent, between 1985-86 and 1998-99. Interestingly, the rural investor households have increased at a compounded growth rate of 30 percent compared to 19 percent for urban investor households.

Growth of investor households have been faster between 1991-92 and 1998-99 than between 1985-86 and 1991-92: Comparison of the estimates of investor households available from the SOFA in 1986, with those available from a survey conducted by SEBI in 1991-92 and the present Survey shows a sharper rise in investor households between the period 1991-92 and 1998-99 than between 1985-86 and 1991-92.

More number of investor households became equity share owners after 1991 than prior to 1991: About 36 percent of the investor households became investors in equity shares prior to 1991, while the majority of the investor households entered the market after 1991. The growth of the investor households in the 1990’s is commensurate with the growth of the securities market in the decade.

The growth pattern of the investor households reflects the pattern of expansion of the market and is consistent with the findings of the earlier Surveys: The primary market expanded rapidly between 1991- 1995 and contracted thereafter. This explains why about 47 percent of the investor households entered the market between 1991-92 and 1995-96 and a fat proportion number – 17 percent – entered the market thereafter.


But despite this growth only a fringe of Indian households have direct investments in equity shares, or debentures or both: More than 156 million, or 92 percent, of all Indian households were non-investor households who did not have any investment in these instruments.

Some of the developed markets have a larger population of investors: In the US for example, according to survey conducted by the Investment Company Institute in 1999, 48.2 percent of the households own equities, directly or indirectly through mutual funds, of which 53 percent, i.e. 25 percent of all US households directly own equity. There is therefore a long way to go for the Indian markets. Majority of the investor households in the US owns equities indirectly through mutual funds as is the case with the Indian market.

The percentage of households owning equity shares or debentures or both is substantially higher in urban areas than in rural areas: Of the 48 million urban households, an estimated 8.8 million households, or 18 per cent, representing approximately 13 million urban investors owned equity shares or debentures or both. Of the 121 million rural households, only about 4 million households, or 3 per cent, representing nearly 6 million rural investors owned these instruments.

Reforms, regulatory framework provided by SEBI and macroeconomic changes were responsible for the growth of the market. Following the reforms which began in June 1991, liberalization in industry, trade, taxation and financial sector had given the impetus to the growth of capital market. The liberalization in private investments, the structural change in the market accompanied by the regulatory environment provided by SEBI for investor protection and development of the market enabled increasingly large number of companies to access the capital market. The growing investment expectations of the households arising from the above factors, the high growth of the economy accompanied by increase in savings rate and greater investor confidence provided by the regulatory environment attracted large number of investors into the market.

Non-investor households are inhibited by several factors: Low per capita income, apprehension of loss of capital and return on capital, and economic insecurity which are all inter-related factors, significantly influence the investment attitude of the households. The lack of awareness about the securities market and the absence of a dependable infrastructure and distribution network which could have facilitated the households’ access to the market, coupled with their aversion to risk, appear to have often inhibited the non-investor households from investing in the securities market. They have instead preferred to rely on traditional institutions such as banks and post offices with which they have had long term relationship. The automation of the stock exchanges began from 1995 and the trading terminals spread in a big way since 1997. The findings of the Survey show that the benefits of these measures were yet to be fully realized.


The Demographics

Demographics of households influence investment preferences of households.

Income is the key determinant of investment decision of households. Median monthly income of the investor households is more than double the median

monthly income of all households in the country. At the same level of income, the percentage of urban investor households is higher

than the rural investor households. Self-employed and salaried class constitute significant majority of the investor

households. The Indian equity investors tend to be middle aged. Majority of all households including non-investor households fall in the low income

group. Ownership of consumer durables by the investor and non-investor households shows

difference in their attitudes towards spending and investment.

The Risk Perception

Investor households diversify their investment portfolio to balance risks. It is the need of the investors to balance the risks in investment, with return and liquidity that lead them to diversify their investment portfolio depending on the level of income of the households.

For households, safety and liquidity i.e. reliability, are the primary considerations which determine the choice of an asset: Graded on a four point scale of risk perception namely: very safe, reasonably safe, somewhat safe and risky, the eight financial instruments surveyed excluding the instruments perceived as risk free, such as contractual savings, NSC, LIC Policy etc. could be classified into four broad categories perception – bank fixed deposits, gold, UTI and other mutual funds and the remaining instruments viz, company deposits, equity shares, debentures, chit funds.

From the point of view of safety; bank fixed deposit stands apart from the rest of the instruments: About 65 percent of all households and 76 percent of the investor households have graded bank fixed deposits as being very safe and only about 14 percent of all households and 4 percent of the investor households did not have any opinion about the risk of bank fixed deposits. Interestingly, only 30 percent ofall households and 37 percent of the investor households have regarded gold as very safe and 31 percent of all households and 15 percent of the investor households had no opinion about the risk in investment in gold.

Investor households are aware of risks in investing in equity shares.


Attractiveness of NBFCs on the decline: Among other forms of fixed deposits, fixed deposits of NBFCs have been considered risky by 48 percent of all households and 33 percent of the investor households. By early 1999, when the survey was being conducted, the problems faced by the NBFCs had become well known and this would perhaps account for the high percentage of the households considering NBFC as being risky.

Hierarchy of risks in certain instruments: Ranked by a ascending order of risk perception, bank fixed deposit were considered very safe i.e. least risky, followed by gold, Units of UTI-US64, UTI-other schemes, Fixed deposits of Non-Government companies, Mutual Funds-equity shares and debentures. Debentures were perceived to be nearly as risky as equity.

The distribution of the investments of all households into different financial instruments corresponds with the risk perceptions: Higher proportion of households has invested in instruments with a lower risk perception. For example, 76 percent of all households have invested in Fixed deposits and about 65 percent of all households consider Fixed deposits to be very safe investments. That such a large percentage of households have some kind of investments in fixed deposits is indeed significant.

The Investment Preferences

o Households’ preference for instruments in which they commonly invest (other than equity shares and debentures) match the risk perception: The percentages of households investing in any instrument, ranked by preference of all households show that the fixed deposits as a class, has the highest preference, followed by recurring deposits of post offices, LIC policies, small savings instruments, contractual savings, UTI schemes, bonds of public sector undertakings, chit funds and public and private sector mutual funds.

Distribution of Households in Instruments by Income Class

o Popularity of some instruments is secular to income class; while of others it is income dependent: This is seen in the relative popularity of bank fixed deposits which has an appeal across all income classes. Tax has an influence particularly among the middle and higher income groups but has little relevance to the lower income group. This is seen by the higher incidence of national savings certificate and national savings schemes among the middle and higher income groups.

o There is a fairly high incidence of households in LIC policies across all income groups: It is interesting to note that at least 29 percent of all households own LIC policies. Its popularity to with the middle and higher income groups, could stem from the inherent need of households for safety and protection in the event of any contingencies. The wide distribution network of LIC agents also has an important role to play in the growth of LIC.


Investment Distribution

A very small percentage of household’s savings is channelized into the securities market. Despite the expansion of the securities market and growth in the number of investor households and in the population of investors, a very small percentage of households savings is channelized into the securities market. This once again highlights the untapped potential of the securities market to channelize household savings.

Investment pattern match the risk perceptions of households: The urban investor households have a higher proportion of the investments in equity shares, debentures and mutual funds compared to the rural households.

There is a correlation between the income levels and investments of the households in securities market related instruments: Thus not more than 5 percent of the investments of the households in the low and middle income groups are in equity shares, debentures and mutual funds compared to around 12 percent for the high income groups.

Despite their growth the mutual funds have not yet become an attractive investment avenue for the low and middle-income groups.

Non-Investor Households’ profile

A very large percentage of the households have not participated so far in the securities market: Security market expansion has still not been able to channelize significant proportions of savings into the securities market.

Rural areas have a larger share of non-investors: The significant majority of the non-investor households are in the rural areas. The percentage of non-investor households in the low-income group is 85 percent for rural areas and 63 percent for urban areas.

A bulk of non-investor households have little or no spare money to invest in the securities market: This is on account of the bulk of the non-investor households belong to the low and middle income groups.

Occupation-wise, the heads of most of the non-investor households are wage earners and self employed: They constitute nearly 77 percent of the total non-investor households. The education level is low as more than 81 percent heads of non-investor households heads are non matriculate or matriculate.

Reasons for not investing in the securities are several: 43 percent of the non-investor households have cited non-availability of time or money as the first reason for not investing in shares or debentures. Mutual funds, which afford small investors as investment vehicle for stock market investment, could identify this segment of non-investor households as a target for mobilization of funds.


The class of non-investor households who lack awareness represent potential investor class: 43 percent of the non-investor households, equivalent to around 60 million households, apparently lack awareness about the stock market. Investor education could impart awareness and education about the procedures of investing in stock markets. This highlights the need for a program of ‘investor education and awareness’ and also the necessity for creating infrastructure to facilitate the channelizing of their savings into stock markets.

Investment Intentions

Bank fixed deposits continue to appeal the most: The share of households investing in a specific instrument is an index of their preference for that instrument, then fixed deposits with banks, appears to be the most preferred form of investment. But how long this appeal will endure in the face of declining interest rates remains to be seen. Fixed deposits with NBFCs have been accorded low priority with only 3 percent of the households intending to invest in these fixed deposits.

Increased majority of existing investor households are unlikely to invest in the securities market: It is significant that the majority of urban investor households (56 percent) and rural investor households (72 percent) are unlikely to make fresh investments in equity shares. This is indeed a matter of concern as it would amount to an expression of a lack of confidence by the existing investors on the equity market.

There is an expected diversification of investment with rise in income levels. Classification of all households planning to invest in the next one year by monthly income levels clearly evidences the expected diversification of investment with level of income. For example, with increasing income levels, higher proportion of households in at that income level invests in UTI. This is true even for equity investments. Investment in mutual funds and equity become popular at higher income levels, indicating an increase in the risk taking abilities at higher income levels.

Equity Investor Households’ Profile

Equity investor households have invested through primary and secondary markets but there are more households investing through the primary market: Out of the 12.1 million equity investor households, 84 percent have invested in equity shares through the primary market and 63 percent have bought equity shares in the secondary market.

The appeal of the secondary market investments seem to be less than the primary market Difficulties faced by households in investing through this route such as lack of easy access to the market, inadequacy of market infrastructure, problem in locating the right intermediary for dealing in the secondary market, lack of guidance and advice, are some of the factors which could have inhibited the households, from investing in


the secondary market. A comparatively small percentage of rural investor households in the secondary market highlighted the non-availability of infrastructure for the secondary market.

More households have become equity investors after 1991: Around 80 percent of the equity investor households were the “first generation investors”.

Equity investor households with higher income have reported better performance of equity investment, probably due to their access to professional advice. Possibly adequate portfolio diversification at higher income levels would also have helped in improving portfolio performance. Lower income groups cannot afford portfolio diversification and are therefore exposed to unsystematic risk.


{III}Objective of the Study

*Title of the project

The project is titled as ‘STUDY OF STOCK EXCHAGES IN INDIA ’

*Objective of the study Estimate the number of households and the population of individual investors who have invested in the

equity market directly or indirectly through mutual funds.

Draw a profile of the households and investors, and describe their demographic, economic, financial and equity ownership characteristics.

Understand their investment preferences for equity as well as other saving instruments available in the market, their perceptions about market risks, their expectations from the market, the nature of their grievances and difficulties.

Estimate the number of households which have refrained from investing in the equity market, describe their demographic characteristics, and analyse the reasons for their reluctance to invest in equity.

Improvement in the service given by brokers/sub-brokers.

Boosting the investors’ confidence in the securities market.

To enable Non-investors who do not invest in securities market either directly or indirectly to invest in equities.

Understanding the needs of the investor/non-investor households and preparing tailor-made plans to suit those needs.


{IV}Scope of the study

Reforms of the Indian economy during the 1990’s have helped to bring the Indian securities market into the main stream of the Indian financial system. As a result, the growth in investment by individual investors has become quite significant. This made it pertinent to have a first hand in depth view of the extent of public participation directly in the securities market or through mutual funds.

The Evolution of Stock Exchanges in India – Origin of Bombay Stock Exchange in 1875 and 23 other Stock Exchanges throughout India. The securities traded were equity, debt, derivatives such as options, futures, and index.

The securities market has essentially three categories of participants, viz., the issuer of securities, the investors in the securities and the intermediaries. The securities have two interdependent and inseparable segments, the new issues (primary) and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The secondary market operated through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counter party and guarantees settlement.

Exchanges in the country, which offer screen based trading system. The trading system is connected using the VSAT technology from over 281 cities. There are 9,335 trading members registered with SEBI as at end March 2006. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS).

Presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities.

Despite having a large number of companies listed on its exchanges, India accounted for a meagre 0.94% in total world turnover in 2005.

Market capitalization as percent for GDP in India stood at 56.1% as at end-2004. There are two depositories in India, viz. NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities. The number of dematerialized securities increased to 201.9 billion at the end of March 2006 from 147.7 billion at the end of March, 2005.

According to the RBI data, household sector accounted for 85.4% of gross domestic savings during 2004-05. However, this has decreased to 83.9% in 2005-06. In the last fiscal 2005-06, they have invested 47.4% of financial savings in deposits, 24.2% in insurance/provident funds, 12.3% on small savings, and 7.2% in securities. Thus the fixed income bearing instruments are the most preferred assets of the household sector.

It appears that more and more people prefer mutual funds (MFs) as their investment vehicle. This change in investor behaviour is induced by the evolution of a regulatory framework for MFs, tax concessions offered by government and preference of investors for passive investing. Starting with an asset base of Rs.250 million in 1964, the total assets under management at the end of March 2006 has risen to Rs.2, 318,620 million. During the last one decade, the resources mobilized by the MFs are increased from Rs.112, 440 million in 1993-94 to Rs.527, 800 million in 2005-06.


The total exchange traded derivatives witnessed a value of Rs.48, 242,592 million during 2005-06 as against Rs.25, 641,269 million during the preceding year. NSE proved itself as the market leader contributing 99.9% of the total turnover in 2005-06 in India.

In the interest of investors, SEBI issued the Disclosure and Investor Protection (DIP) guidelines. These guidelines contain a substantial body of requirements for issuers/intermediaries, with a broad intention to ensure that all the concerned entities observe high standards of integrity and fair dealing.

DEA, DCA, the SEBI and the stock exchanges have set up investor grievance cells for redressed of investor grievance. The exchanges maintain investor protection funds to take care of investor claims.

Government Securities Market: Non-competitive bids are accepted from retail investors in order to widen investor base. Further, to facilitate retail investors to invest in government securities, RBI permitted select entities to provide custody (Constituent SGL) accounts. Other measures include abolition of TDS on government securities and stamp duties on transfer of demat debt securities.

The terms of reference of the study were to estimate the number of household and the population of individual investors, their economic and demographic profile, portfolio size, investment preferences for equity as well as other saving instruments. The study was also designed to elicit information from households on their risk perceptions, experiences in investing in security market, return on investment and the like. Other areas to be covered included awareness of investor rights, experiences with grievance redressed mechanisms; indications of investors’ future plans of investment and their expectations from the securities market were Also obtained. The study also provided estimates of non-investor households and population, their economic and demographic profile, their pattern of investment in various instruments and reasons of non-investment in the equity market.

To help gauge the impact of the growth of the securities market on the households to conduct a comprehensive survey of Indian Investor households.

The project also covers to study the basic investor/potential investor/non-Investment preferences, intentions, attitudes, perception, interests, like and dislikes towards investment

in securities market.

It also focuses its attention towards the brokers’ services, the extent of attracting investors, the opportunities and their ability to face the challenges in the global competitive environment.

Lastly, on the basis of the study, to determine the measures to be adopted to improve the level of confidence of investors in the securities market.

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44117927 Project Study of Stock Exchanges