Embed Size (px)
Citation preview
CHAPTER
10FFFFFINANCIALINANCIALINANCIALINANCIALINANCIAL M M M M MARKETSARKETSARKETSARKETSARKETS
IIIIIDEADEADEADEADEA SEEKSSEEKSSEEKSSEEKSSEEKS TOTOTOTOTO C C C C CAPITALISEAPITALISEAPITALISEAPITALISEAPITALISE ONONONONON
MMMMMARKETARKETARKETARKETARKET M M M M MOMENTUMOMENTUMOMENTUMOMENTUMOMENTUM
With the explosive growth of theirsubscriber base, telecom companiesare all looking at capital markets toraise funds to fuel their expansionplan. Idea Cellular, the fifth largestoperator in the country and theflagship telecom venture of AV BirlaGroup, has decided to enter the capitalmarket to raise between Rs. 1,700 andRs. 2,000 crore.
The company has appointed J.M.Morgan Stanley, Merrill Lynch amongother as book-runners for theproposed Initial Public Offer (IPO),which is expected to be ready byJanuary end.
Since, under SEBI norms, theminimum float size is 10 per cent, thecompany will divest between 10and 12 per cent, “The last privateplacement made by the promoters isat a market capitalisation ofRs. 15,000 crore. The proposed floatis expected to be at 10 to 20 per centpremium of the private placementprice,” AV Birla Group recentlydivested 35 per cent stake in thecompany to a clutch of private equityfirms. However, this is a fresh issue ofshares, where the proceeds will beutilised by Ideal Cellular for capitalexpenditure. After the proposedissues, the promoters stake will comedown to around 58 per cent.
Source: www.hindustantimes.comSource: www.hindustantimes.comSource: www.hindustantimes.comSource: www.hindustantimes.comSource: www.hindustantimes.com
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
After studying this chapter, youshould be able to:
Ø explain the meaning ofFinancial Market;
Ø explain the meaning of MoneyMarket and describe its majorInstruments;
Ø explain the nature and types ofCapital Market;
Ø distinguish between MoneyMarket and Capital Market;
Ø explain the meaning andfunctions of Stock Exchange;
Ø describe the functioning of NSEIand OTCEI; and
Ø describe the role of SEBI ininvestor protection.
2015-16(21/01/2015)
BUSINESS STUDIES
268
IIIIINTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTION
You all know that a business needsfinance from the time an entrepreneurmakes the decision to start it. It needsfinance both for working capitalrequirements such as payments forraw materials and salaries to itsemployees, and fixed capitalexpenditure such as the purchase ofmachinery or building or to expand itsproduction capacity. The aboveexample gives a fair picture of howcompanies need to raise funds from thecapital markets. Idea Cellular decidedto enter the Indian capital market forits needs of expansion. In this chapteryou will study concepts like privateplacement, Initial public Offer (IPO) andcapital markets which you come acrossin the example of Idea Cellular.Business can raise these funds fromvarious sources and in different waysthrough financial markets. Thischapter provides a brief description ofthe mechanism through which financesare mobilised by a business organisationfor both short term and long termrequirements. It also explains theinstitutional structure and the regulatorymeasures for different financial markets.
CCCCCONCEPTONCEPTONCEPTONCEPTONCEPT OFOFOFOFOF F F F F FINANCIALINANCIALINANCIALINANCIALINANCIAL M M M M MARKETARKETARKETARKETARKET
A business is a part of an economicsystem that consists of two main
sectors – households which save fundsand business firms which invest thesefunds. A financial market helps to linkthe savers and the investors bymobilizing funds between them. Indoing so it performs what is known asan allocative function. It allocates ordirects funds available for investmentinto their most productive investmentopportunity. When the allocativefunction is performed well, twoconsequences follow:
• The rate of return offered tohouseholds would be higher
• Scarce resources are allocated tothose firms which have the highestproductivity for the economy.
There are two major alternativemechanisms through which allocationof funds can be done: via banks orvia financial markets. Households candeposit their surplus funds withbanks, who in turn could lend thesefunds to business firms. Alternately,households can buy the shares anddebentures offered by a businessusing financial markets. The processby which allocation of funds is doneis called financial intermediation.Banks and financial markets arecompeting intermediaries in thefinancial system, and give householdsa choice of where they want to placetheir savings.
HOUSEHOLDS BUSINESS FIRMS
INVESTORSSAVERS
BANKS FINANCIAL MARKETS
2015-16(21/01/2015)
FINANCIAL MARKET
269
wherever a financial transactionoccurs. Financial transactions couldbe in the form of creation of financialassets such as the initial issue ofshares and debentures by a firm or thepurchase and sale of existing financialassets like equity shares, debenturesand bonds.
FFFFFUNCTIONSUNCTIONSUNCTIONSUNCTIONSUNCTIONS OFOFOFOFOF F F F F FINANCIALINANCIALINANCIALINANCIALINANCIAL M M M M MARKETARKETARKETARKETARKET
Financial markets play an importantrole in the allocation of scarceresources in an economy by performingthe following four important functions.
facilitates the transfer of savings fromsavers to investors. It gives savers thechoice of different investments and thushelps to channelise surplus funds intothe most productive use.
2.2.2.2.2. FacilitatFacilitatFacilitatFacilitatFacilitat inginginginging Price Discovery: Price Discovery: Price Discovery: Price Discovery: Price Discovery: Youall know that the forces of demand andsupply help to establish a price for acommodity or service in the market. Inthe financial market, the households aresuppliers of funds and business firmsrepresent the demand. The interactionbetween them helps to establish a pricefor the financial asset which is beingtraded in that particular market.
A financial market is a market forthe creation and exchange of financialassets. Financial markets exist
Financial System
1.1.1.1.1. MobiliMobiliMobiliMobiliMobilisssssation of ation of ation of ation of ation of SSSSSavings andavings andavings andavings andavings andCCCCChanneling them into the mosthanneling them into the mosthanneling them into the mosthanneling them into the mosthanneling them into the mostPPPPProductive roductive roductive roductive roductive UUUUUses:ses:ses:ses:ses: A financial market
2015-16(21/01/2015)
BUSINESS STUDIES
270
3.3.3.3.3. ProvidProvidProvidProvidProvidinginginginging Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to FinancialAssets:Assets:Assets:Assets:Assets: Financial markets facilitate easypurchase and sale of financial assets.In doing so they provide liquidity tofinancial assets, so that they can beeasily converted into cash wheneverrequired. Holders of assets can readilysell their financial assets through themechanism of the financial market.
4.Reduc4.Reduc4.Reduc4.Reduc4.Reducinginginginging the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions:Financial markets provide valuableinformation about securities beingtraded in the market. It helps to savetime, effort and money that bothbuyers and sellers of a financial assetwould have to otherwise spend to tryand find each other. The financialmarket is thus, a common platformwhere buyers and sellers can meet forfulfillment of their individual needs.
Financial markets are classified onthe basis of the maturity of financialinstruments traded in them.Instruments with a maturity of less
than one year are traded in the moneymarket. Instruments with longermaturity are traded in the capitalmarket.
MMMMMONEYONEYONEYONEYONEY M M M M MARKETARKETARKETARKETARKET
The money market is a market forshort term funds which deals inmonetary assets whose period ofmaturity is upto one year. These assetsare close substitutes for money. It is amarket where low risk, unsecuredand short term debt instruments thatare highly liquid are issued andactively traded everyday. It has nophysical location, but is an activityconducted over the telephone andthrough the internet. It enables theraising of short-term funds for meetingthe temporary shortages of cash andobligations and the temporarydeployment of excess funds for earningreturns. The major participants in themarket are the Reserve Bank of India
Classification of Financial MarketsClassification of Financial MarketsClassification of Financial MarketsClassification of Financial MarketsClassification of Financial Markets
FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
Primary market Secondary Market
Debt Equity Debt Equity
2015-16(21/01/2015)
FINANCIAL MARKET
271
(RBI), Commercial Banks, Non-Banking Finance Companies, StateGovernments, Large Corporate Housesand Mutual Funds.
MMMMMONEYONEYONEYONEYONEY M M M M MARKETARKETARKETARKETARKET I I I I INSTRUMENTSNSTRUMENTSNSTRUMENTSNSTRUMENTSNSTRUMENTS
11111..... Treasury Bill: Treasury Bill: Treasury Bill: Treasury Bill: Treasury Bill: A Treasury bill isbasically an instrument of short-termborrowing by the Government of Indiamaturing in less than one year. Theyare also known as Zero Coupon Bondsissued by the Reserve Bank of India onbehalf of the Central Government tomeet its short-term requirement offunds. Treasury bills are issued in theform of a promissory note. They arehighly liquid and have assured yieldand negligible risk of default. They areissued at a price which is lower thantheir face value and repaid at par. Thedifference between the price at whichthe treasury bills are issued and theirredemption value is the interestreceivable on them and is calleddiscount. Treasury bills are availablefor a minimum amount of Rs 25,000and in multiples thereof.
Example: Suppose an investorpurchases a 91 days Treasury bill witha face value of Rs. 1,00,000 forRs. 96,000. By holding the bill until thematurity date, the investor receivesRs. 1,00,000. The difference ofRs. 4,000 between the proceedsreceived at maturity and the amountpaid to purchase the bill represents theinterest received by him.
2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: Commercialpaper is a short-term unsecuredpromissory note, negotiable and
transferable by endorsement anddelivery with a fixed maturity period. Itis issued by large and creditworthycompanies to raise short-term funds atlower rates of interest than market rates.It usually has a maturity period of 15days to one year. The issuance ofcommercial paper is an alternative tobank borrowing for large companiesthat are generally considered to befinancially strong. It is sold at a discountand redeemed at par. The originalpurpose of commercial paper was toprovide short-terms funds for seasonaland working capital needs. For examplecompanies use this instrument forpurposes such as bridge financing.
Example: Suppose a company needslong-term finance to buy somemachinery. In order to raise the longterm funds in the capital market thecompany will have to incur floatationcosts (costs associated with floating ofan issue are brokerage, commission,printing of applications and advertisingetc.). Funds raised through commercialpaper are used to meet the floatationcosts. This is known as Bridge Financing.
3.3.3.3.3. Call Money: Call Money: Call Money: Call Money: Call Money: Call money is shortterm finance repayable on demand, witha maturity period of one day to fifteendays, used for inter-bank transactions.Commercial banks have to maintain aminimum cash balance known as cashreserve ratio. The Reserve Bank of Indiachanges the cash reserve ratio from timeto time which in turn affects the amountof funds available to be given as loansby commercial banks. Call money is amethod by which banks borrow fromeach other to be able to maintain the
2015-16(21/01/2015)
BUSINESS STUDIES
272
cash reserve ratio. The interest rate paidon call money loans is known as the callrate. It is a highly volatile rate that variesfrom day-to-day and sometimes evenfrom hour-to-hour. There is an inverserelationship between call rates andother short-term money marketinstruments such as certificates ofdeposit and commercial paper. A rise incall money rates makes other sourcesof finance such as commercial paperand certificates of deposit cheaper incomparison for banks raise funds fromthese sources.
4.4.4.4.4. Certificate of Deposit:Certificate of Deposit:Certificate of Deposit:Certificate of Deposit:Certificate of Deposit: Certificatesof deposit (CD) are unsecured,negotiable, short-term instruments inbearer form, issued by commercialbanks and development financialinstitutions. They can be issued toindividuals, corporations andcompanies during periods of tightliquidity when the deposit growth ofbanks is slow but the demand for
credit is high. They help to mobilise alarge amount of money for shortperiods.
5.5.5.5.5. Commercial Bill: Commercial Bill: Commercial Bill: Commercial Bill: Commercial Bill: A commercialbill is a bill of exchange used to financethe working capital requirements ofbusiness firms. It is a short-term,negotiable, self-liquidating instrumentwhich is used to finance the credit salesof firms. When goods are sold on credit,the buyer becomes liable to makepayment on a specific date in future.The seller could wait till the specifieddate or make use of a bill of exchange.The seller (drawer) of the goods drawsthe bill and the buyer (drawee) acceptsit. On being accepted, the bill becomesa marketable instrument and is calleda trade bill. These bills can bediscounted with a bank if the sellerneeds funds before the bill matures.When a trade bill is accepted by acommercial bank it is known as acommercial bill.
Sterlite IndustriesSterlite IndustriesSterlite IndustriesSterlite IndustriesSterlite Industries
Sterlite Industries, part of the London listed Vedanta Resources Group, isscheduled to be listed on the New York Stock Exchange through an initialpublic offering (IPO) of about $2 billion. The proceeds will be used to fund its$1.9 billion, Greenfield power project in Orissa and to expand its aluminiumand copper facilities.
The IPO is a part of an enabling resolution passed by Sterlite to raise upto12,500 crores through American Depository Shares (ADS). Consequently, thecompany has increased its authorised capital from Rs 150 crore toRs 185 crore by creating an additional 17.5 crore equity shares of Rs 2 each.The shares of Sterlite, which will be among the first metal firms from India tolist on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSEon the day of the announcement.
Source: The Economic TimesSource: The Economic TimesSource: The Economic TimesSource: The Economic TimesSource: The Economic Times
2015-16(21/01/2015)
FINANCIAL MARKET
273
CCCCCAPITALAPITALAPITALAPITALAPITAL M M M M MARKETARKETARKETARKETARKET
The term capital market refers to facilitiesand institutional arrangements throughwhich long-term funds, both debt andequity are raised and invested. Itconsists of a series of channels throughwhich savings of the community aremade available for industrial andcommercial enterprises and for thepublic in general. It directs these savingsinto their most productive use leadingto growth and development of theeconomy. The capital market consistsof development banks, commercialbanks and stock exchanges.
An ideal capital market is one wherefinance is available at reasonable cost.The process of economic developmentis facilitated by the existence of a wellfunctioning capital market. In fact,development of the financial system isseen as a necessary condition foreconomic growth. It is essential thatfinancial institutions are sufficientlydeveloped and that market operationsare free, fair, competitive andtransparent. The capital market shouldalso be efficient in respect of theinformation that it delivers, minimisetransaction costs and allocate capitalmost productively.
The Capital Market can be dividedinto two parts: a. Primary Marketb. Secondary Market
Distinction between Capital MarketDistinction between Capital MarketDistinction between Capital MarketDistinction between Capital MarketDistinction between Capital Marketand Money Marketand Money Marketand Money Marketand Money Marketand Money Market
The major points of distinction betweenthe two markets are as follows:
(i) Participants: The participants in thecapital market are financial
institutions, banks, corporateentities, foreign investors andordinary retail investors frommembers of the public. Participationin the money market is by and largeundertaken by institutionalparticipants such as the RBI, banks,financial institutions and financecompanies. Individual investorsalthough permitted to transact in thesecondary money market, do notnormally do so.
(ii) Instruments: The main instrumentstraded in the capital market are –equity shares, debentures, bonds,preference shares etc. The maininstruments traded in the moneymarket are short term debtinstruments such as T-bills, tradebills reports, commercial paper andcertificates of deposit.
(iii) Investment Outlay: Investment in thecapital market i.e. securities does notnecessarily require a huge financialoutlay. The value of units ofsecurities is generally low i.e. Rs 10,Rs 100 and so is the case withminimum trading lot of shares whichis kept small i.e. 5, 50, 100 or so. Thishelps individuals with small savingsto subscribe to these securities. In themoney market, transactions entailhuge sums of money as theinstruments are quite expensive.
(iv) Duration: The capital market dealsin medium and long term securitiessuch as equity shares anddebentures. Money marketinstruments have a maximumtenure of one year, and may evenbe issued for a single day.
2015-16(21/01/2015)
BUSINESS STUDIES
274
(v) Liquidity: Capital market securitiesare considered liquid investmentsbecause they are marketable onthe stock exchanges. However, ashare may not be actively traded,i.e. it may not easily find a buyer.Money market instruments on theother hand, enjoy a higher degreeof liquidity as there is formalarrangement for this. The DiscountFinance House of India (DFHI) hasbeen established for the specificobjective of providing a readymarket for money marketinstruments.
(vi) Safety: Capital marketinstruments are riskier both withrespect to returns and principalrepayment. Issuing companiesmay fail to perform as perprojections and promoters maydefraud investors. But the moneymarket is generally much saferwith a minimum risk of default.This is due to the shorter durationof investing and also to financialsoundness of the issuers, whichprimarily are the government,banks and highly ratedcompanies.
(vii) Expected return: The investmentin capital markets generally yielda higher return for investors thanthe money markets. The possibilityof earnings is higher if thesecurities are held for a longerduration. First, there is the scopeof earning capital gains in equityshare. Second, in the long run, theprosperity of a company is sharedby shareholders by way of highdividends and bonus issues.
PPPPPRIMARYRIMARYRIMARYRIMARYRIMARY M M M M MARKETARKETARKETARKETARKET
The primary market is also known asthe new issues market. It deals withnew securities being issued for the firsttime. The essential function of a primarymarket is to facilitate the transfer ofinvestible funds from savers toentrepreneurs seeking to establish newenterprises or to expand existing onesthrough the issue of securities for thefirst time. The investors in this marketare banks, financial institutions,insurance companies, mutual fundsand individuals.
A company can raise capitalthrough the primary market in the formof equity shares, preference shares,debentures, loans and deposits. Fundsraised may be for setting up newprojects, expansion, diversification,modernisation of existing projects,mergers and takeovers etc.
Methods of FloatationMethods of FloatationMethods of FloatationMethods of FloatationMethods of Floatation
There are various methods of floatingnew issues in the primary market :
1. Offer through Prospectus:1. Offer through Prospectus:1. Offer through Prospectus:1. Offer through Prospectus:1. Offer through Prospectus: Offerthrough prospectus is the mostpopular method of raising funds bypublic companies in the primarymarket. This involves invitingsubscription from the public throughissue of prospectus. A prospectusmakes a direct appeal to investors toraise capital, through an advertisementin newspapers and magazines. Theissues may be underwritten and alsoare required to be listed on at least onestock exchange. The contents of theprospectus have to be in accordance
2015-16(21/01/2015)
FINANCIAL MARKET
275
with the provisions of the CompaniesAct and SEBI disclosure and investorprotection guidelines.
2. Offer for Sale:2. Offer for Sale:2. Offer for Sale:2. Offer for Sale:2. Offer for Sale: Under this methodsecurities are not issued directly to thepublic but are offered for sale throughintermediaries like issuing houses orstock brokers. In this case, a companysells securities enbloc at an agreed priceto brokers who, in turn, resell them tothe investing public.
3. Private Placement:3. Private Placement:3. Private Placement:3. Private Placement:3. Private Placement: Privateplacement is the allotment of securitiesby a company to institutional investorsand some selected individuals. It helpsto raise capital more quickly than apublic issue. Access to the primary
market can be expensive on account ofvarious mandatory and non-mandatory expenses. Some companies,therefore, cannot afford a public issueand choose to use private placement.
4. Rights Issue:4. Rights Issue:4. Rights Issue:4. Rights Issue:4. Rights Issue: This is a privilege givento existing shareholders to subscribeto a new issue of shares according tothe terms and conditions of thecompany. The shareholders are offeredthe ‘right’ to buy new shares inproportion to the number of sharesthey already possess.
5. e-IPOs: 5. e-IPOs: 5. e-IPOs: 5. e-IPOs: 5. e-IPOs: A company proposing toissue capital to the public through theon-line system of the stock exchangehas to enter into an agreement with the
PPPPPRIMARYRIMARYRIMARYRIMARYRIMARY ANDANDANDANDAND S S S S SECONDARYECONDARYECONDARYECONDARYECONDARY M M M M MARKETSARKETSARKETSARKETSARKETS —A C —A C —A C —A C —A COMPARISONOMPARISONOMPARISONOMPARISONOMPARISON
Primary Market Secondary Market(New Issue Market) (Stock Exchange)
(i) There is sale of securities by newcompanies or further (new issuesof securities by existing companiesto investors).
(ii) Securities are sold by the companyto the investor directly (or throughan intermediary).
(iii) The flow of funds is from savers toinvestors, i.e. the primary marketdirectly promotes capital formation.
(iv) Only buying of securities takesplace in the primary market,securities cannot be sold there.
(v) Prices are determined and decidedby the management of the company.
(vi) There is no fixed geographicallocation.
(i) There is trading of existing sharesonly.
(ii) Ownership of existing securities isexchanged between investors. Thecompany is not involved at all.
(iii) Enhances encashability (liquidity) ofshares, i.e. the secondary marketindirectly promotes capital formation.
(iv) Both the buying and the selling ofsecurities can take place on thestock exchange.
(v) Prices are determined by demandand supply for the security.
(vi) Located at specified places.
2015-16(21/01/2015)
BUSINESS STUDIES
276
History of the Stock Market in IndiaHistory of the Stock Market in IndiaHistory of the Stock Market in IndiaHistory of the Stock Market in IndiaHistory of the Stock Market in India
The history of the stock market in India goes back to the end of the eighteenthcentury when long-term negotiable securities were first issued. In 1850 theCompanies Act was introduced for the first time bringing with it the feature oflimited liability and generating investor interest in corporate securities. Thefirst stock exchange in India was set-up in 1875 as The Native Share andStock Brokers Association in Bombay. Today it is known as the Bombay StockExchange (BSE). This was followed by the development of exchanges inAhmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to notethat stock exchanges were first set up in major centers of trade and commerce.
Until the early 1990s, the Indian secondary market comprised regionalstock exchanges with BSE heading the list. After the reforms of 1991, theIndian secondary market acquired a three tier form. This consists of:• Regional Stock Exchanges
• National Stock Exchange (NSE)
• Over the Counter Exchange of India (OTCEI)
stock exchange. This is called an InitialPublic Offer (IPO). SEBI registeredbrokers have to be appointed for thepurpose of accepting applications andplacing orders with the company. Theissuer company should also appoint aregistrar to the issue having electronicconnectivity with the exchange. Theissuer company can apply for listing ofits securities on any exchange otherthan the exchange through which it hasoffered its securities. The lead managercoordinates all the activities amongstintermediaries connected with the issue.
SSSSSECONDARYECONDARYECONDARYECONDARYECONDARY M M M M MARKETARKETARKETARKETARKET
The secondary market is also knownas the stock market or stock exchange.It is a market for the purchase and saleof existing securities. It helps existinginvestors to disinvest and freshinvestors to enter the market. It alsoprovides liquidity and marketability to
existing securities. It also contributesto economic growth by channelisingfunds towards the most productiveinvestments through the process ofdisinvestment and reinvestment.Securities are traded, cleared andsettled within the regulatory frameworkprescribed by SEBI. Advances ininformation technology have madetrading through stock exchangesaccessible from anywhere in thecountry through trading terminals.Along with the growth of the primarymarket in the country, the secondarymarket has also grown significantlyduring the last ten years.
SSSSSTOCKTOCKTOCKTOCKTOCK E E E E EXCHANGEXCHANGEXCHANGEXCHANGEXCHANGE
A stock exchange is an institutionwhich provides a platform for buyingand selling of existing securities. As amarket, the stock exchange facilitatesthe exchange of a security (share,
2015-16(21/01/2015)
FINANCIAL MARKET
277
debenture etc.) into money and viceversa. Stock exchanges helpcompanies raise finance, provideliquidity and safety of investment to theinvestors and enhance the creditworthiness of individual companies.
Meaning of Stock ExchangeMeaning of Stock ExchangeMeaning of Stock ExchangeMeaning of Stock ExchangeMeaning of Stock Exchange
According to Securities Contracts(Regulation) Act 1956, stock exchangemeans any body of individuals, whetherincorporated or not, constituted for thepurpose of assisting, regulating orcontrolling the business of buying andselling or dealing in securities.
Functions of a Stock ExchangeFunctions of a Stock ExchangeFunctions of a Stock ExchangeFunctions of a Stock ExchangeFunctions of a Stock Exchange
The efficient functioning of a stockexchange creates a conducive climatefor an active and growing primarymarket for new issues. An active andhealthy secondary market in existingsecurities leads to positive environmentamong investors. The following aresome of the important functions of astock exchange.
1. Providing Liquidity and Market-1. Providing Liquidity and Market-1. Providing Liquidity and Market-1. Providing Liquidity and Market-1. Providing Liquidity and Market-ability to Existing Securities: ability to Existing Securities: ability to Existing Securities: ability to Existing Securities: ability to Existing Securities: Thebasic function of a stock exchange is thecreation of a continuous market wheresecurities are bought and sold. It givesinvestors the chance to disinvest andreinvest. This provides both liquidity andeasy marketability to already existingsecurities in the market.
2. Pricing of Securities: 2. Pricing of Securities: 2. Pricing of Securities: 2. Pricing of Securities: 2. Pricing of Securities: Share priceson a stock exchange are determined bythe forces of demand and supply. Astock exchange is a mechanism ofconstant valuation through which theprices of securities are determined.Such a valuation provides importantinstant information to both buyers andsellers in the market.
3. Safety of Transaction: 3. Safety of Transaction: 3. Safety of Transaction: 3. Safety of Transaction: 3. Safety of Transaction: Themembership of a stock exchange is well-regulated and its dealings are welldefined according to the existing legalframework. This ensures that theinvesting public gets a safe and fair dealon the market.
4. Contributes to Economic Growth:4. Contributes to Economic Growth:4. Contributes to Economic Growth:4. Contributes to Economic Growth:4. Contributes to Economic Growth:A stock exchange is a market in whichexisting securities are resold or traded.Through this process of disinvestmentand reinvestment savings getchannelised into their most productiveinvestment avenues. This leads tocapital formation and economic growth.
5. Spreading of Equity Cult: 5. Spreading of Equity Cult: 5. Spreading of Equity Cult: 5. Spreading of Equity Cult: 5. Spreading of Equity Cult: The stockexchange can play a vital role inensuring wider share ownership byregulating new issues, better tradingpractices and taking effective steps ineducating the public about investments.
Bombay Stock Exchange
2015-16(21/01/2015)
BUSINESS STUDIES
278
6. Providing Scope for Speculation:6. Providing Scope for Speculation:6. Providing Scope for Speculation:6. Providing Scope for Speculation:6. Providing Scope for Speculation:The stock exchange provides sufficientscope within the provisions of law forspeculative activity in a restricted andcontrolled manner. It is generallyaccepted that a certain degree of healthyspeculation is necessary to ensureliquidity and price continuity in thestock market.
TTTTTRADINGRADINGRADINGRADINGRADING ANDANDANDANDAND S S S S SETTLEMENTETTLEMENTETTLEMENTETTLEMENTETTLEMENT P P P P PROCEDUREROCEDUREROCEDUREROCEDUREROCEDURE
Trading in securities is now executedthrough an on-line, screen-basedelectronic trading system. Simply put,all buying and selling of shares anddebentures are done through acomputer terminal.
There was a time when in the openoutcry system, securities were boughtand sold on the floor of the stockexchange. Under this auction system,deals were struck among brokers,prices were shouted out and the sharessold to the highest bidder. However,now almost all exchanges have gone
electronic and trading is done in thebroker’s office through a computerterminal. A stock exchange has its maincomputer system with many terminalsspread across the country. Trading insecurities is done through brokers whoare members of the stock exchange.Trading has shifted from the stockmarket floor to the brokers office.
Every broker has to have access toa computer terminal that is connectedto the main stock exchange. In thisscreen-based trading, a member logson to the site and any informationabout the shares (company, member,etc.) he wishes to buy or sell and theprice is fed into the computer. Thesoftware is so designed that thetransaction will be executed when amatching order is found from a counterparty. The whole transaction is carriedon the computer screen with both theparties being able to see the prices ofall shares going up and down at alltimes during the time that business istransacted and during business hoursof the stock exchange. The computerin the brokers office is constantlymatching the orders at the best bid andoffer price. Those that are not matchedremain on the screen and are open forfuture matching during the day.
Electronic trading systems orscreen-based trading has certainadvantages:
1. It ensures transparency as it allowsparticipants to see the prices of allsecurities in the market whilebusiness is being transacted. They
Electronic Trading System
2015-16(21/01/2015)
FINANCIAL MARKET
279
are able to see the full marketduring real time.
2. It increases efficiency of informationbeing passed on, thus helping infixing prices efficiently. Thecomputer screens displayinformation on prices and alsocapital market developments thatinfluence share prices.
3. It increases the efficiency ofoperations, since there is reductionin time, cost and risk of error.
4. People from all over the countryand even abroad who wish toparticipate in the stock market canbuy or sell securities throughbrokers or members withoutknowing each other. That is, theycan sit in the broker’s office, log onto the computer at the same timeand buy or sell securities. Thissystem has enabled a large numberof participants to trade with eachother, thereby improving theliquidity of the market.
5. A single trading platform has beenprovided as business is transactedat the same time in all the tradingcentres. Thus, all the tradingcentres spread all over the countryhave been brought onto onetrading platform, i.e., the stockexchange, on the computer.
Now, screen-based trading or on-linetrading is the only way in which youcan buy or sell shares. Shares can beheld either in physical form or anelectronic book entry form of holding
and transferring shares can also beadopted. This electronic form is calleddematerialised form.
Steps in the Trading andSteps in the Trading andSteps in the Trading andSteps in the Trading andSteps in the Trading andSettlement ProcedureSettlement ProcedureSettlement ProcedureSettlement ProcedureSettlement Procedure
It has been made compulsory to settleall trades within 2 days of the tradedate, i.e., on a T+2 basis, since 2003.Prior to the reforms, securities werebought and sold, i.e., traded and allpositions in the stock exchange weresettled on a weekly/fortnightlysettlement cycle whether it was deliveryof securities or payment of cash. Thissystem prevailed for a long time as itincreased the volume of trading on theexchange and provided liquidity to thesystem. However, since trades were tobe settled on specified dates, this gaverise to speculation and price of sharesused to rise and fall suddenly due totrading and defaults by brokers. A newsystem, i.e, rolling settlement, wasintroduced in 2000, so that whenevera trade took place it would be settledafter some days. Since 2003, all shareshave to be covered under the rollingsettlement system on a T+2 basis,meaning thereby that transactions insecurities are settled within 2 days afterthe trade date. Since rolling settlementimplies fast movement of shares, itrequires effective implementation ofelectronic fund transfer anddematerialisation of shares.
The following steps are involved inthe screen-based trading for buying
and selling of securities:
2015-16(21/01/2015)
BUSINESS STUDIES
280
1. If an investor wishes to buy or sell
any security he has to firstapproach a registered broker or
sub-broker and enter into anagreement with him. The investor
has to sign a broker-clientagreement and a client registration
form before placing an order to buyor sell securities. He has also to
provide certain other details andinformation. These include:
• PAN number(This is mandatory)
• Date of birth and address.
• Educational qualification and
occupation.
• Residential status (Indian/NRI).
• Bank account details.
• Depository account details.
• Name of any other broker withwhom registered.
• Client code number in the clientregistration form.
The broker then opens a tradingaccount in the name of the investor.
2. The investor has to open a ‘demat’account or ‘beneficial owner’ (BO)
account with a depositoryparticipant (DP) for holding and
transferring securities in the dematform. He will also have to open a
bank account for cash transactionsin the securities market.
3. The investor then places an orderwith the broker to buy or sell
shares. Clear instructions have to
be given about the number of
shares and the price at which theshares should be bought or sold.
The broker will then go ahead withthe deal at the above mentioned
price or the best price available. Anorder confirmation slip is issued to
the investor by the broker.
4. The broker then will go on-line and
connect to the main stock exchangeand match the share and best price
available.
5. When the shares can be bought or
sold at the price mentioned, it willbe communicated to the broker’s
terminal and the order will beexecuted electronically. The broker
will issue a trade confirmation slipto the investor.
6. After the trade has been executed,within 24 hours the broker issues
a Contract Note. This note containsdetails of the number of shares
bought or sold, the price, the dateand time of deal, and the brokerage
charges. This is an importantdocument as it is legally enforceable
and helps to settle disputes/claimsbetween the investor and the
broker. A Unique Order Codenumber is assigned to each
transaction by the stock exchangeand is printed on the contract note.
7. Now, the investor has to deliver theshares sold or pay cash for the
shares bought. This should be doneimmediately after receiving the
2015-16(21/01/2015)
FINANCIAL MARKET
281
contract note or before the day whenthe broker shall make payment or
delivery of shares to the exchange.This is called the pay-in day.
8. Cash is paid or securities aredelivered on pay-in day, which isbefore the T+2 day as the deal has
to be settled and finalised on theT+2 day. The settlement cycle is on
T+2 day on a rolling settlementbasis, w.e.f. 1 April 2003.
9. On the T+2 day, the exchange will
deliver the share or make paymentto the other broker. This is called
the pay-out day. The broker thenhas to make payment to theinvestor within 24 hours of the pay-
out day since he has alreadyreceived payment from the
exchange.
10.The broker can make delivery ofshares in demat form directly to the
investor’s demat account. Theinvestor has to give details of his
demat account and instruct hisdepository participant to takedelivery of securities directly in his
beneficial owner account.
Dematerialisation andDematerialisation andDematerialisation andDematerialisation andDematerialisation andDepositoriesDepositoriesDepositoriesDepositoriesDepositories
All trading in securities is now donethrough computer terminals. Since allsystems are computerised, buying andselling of securities are settled throughan electronic book entry form. This ismainly done to eliminate problems liketheft, fake/forged transfers, transfer
delays and paperwork associated withshare certificates or debentures held inphysical form.
This is a process where securitiesheld by the investor in the physicalform are cancelled and the investor isgiven an electronic entry or number sothat she/he can hold it as an electronicbalance in an account. This process ofholding securities in an electronic formis called dematerialisation. For this, theinvestor has to open a demat accountwith an organisation called adepository. In fact, now all Initial PublicOffers (IPOs) are issued indematerialisation form and more than99% of the turnover is settled bydelivery in the demat form.
The Securities and Exchange Boardof India (SEBI) has made it mandatoryfor the settlement procedures to takeplace in demat form in certain selectsecurities. Holding shares in dematform is very convenient as it is just like a bank account. Physical sharescan be converted into electronic formor electronic holdings can bereconverted into physical certificates(rematerialisation). Dematerialisationenables shares to be transferred tosome other account just like cash andensures settlement of all tradesthrough a single account in shares.These demat securities can even bepledged or hypothecated to get loans.There is no danger of loss, theft orforgery of share certificates. It is thebroker’s responsibility to credit theinvestor’s account with the correctnumber of shares.
2015-16(21/01/2015)
BUSINESS STUDIES
282
Working of the Demat SystemWorking of the Demat SystemWorking of the Demat SystemWorking of the Demat SystemWorking of the Demat System
1. A depository participant (DP),either a bank, broker, or financialservices company, may beidentified.
2. An account opening form anddocumentation (PAN card details,photograph, power of attorney)may be completed.
3. The physical certificate is to begiven to the DP along with adematerialisation request form.
4. If shares are applied in a publicoffer, simple details of DP anddemat account are to be given andthe shares on allotment wouldautomatically be credited to thedemat account.
5. If shares are to be sold through abroker, the DP is to be instructedto debit the account with thenumber of shares.
6. The broker then gives instructionto his DP for delivery of the sharesto the stock exchange.
7. The broker then receives paymentand pay the person for the sharessold.
8. All these transactions are to becompleted within 2 days, i.e.,delivery of shares and paymentreceived from the buyer is on a T+2basis, settlement period.
DepositoryDepositoryDepositoryDepositoryDepository
Just like a bank keeps money in safecustody for customers, a depositoryalso is like a bank and keeps securities
in electronic form on behalf of theinvestor. In the depository a securitiesaccount can be opened, all shares canbe deposited, they can be withdrawn/sold at any time and instruction todeliver or receive shares on behalf of theinvestor can be given. It is a technologydriven electronic storage system. It hasno paper work relating to sharecertificates, transfer, forms, etc. Alltransactions of the investors are settledwith greater speed, efficiency and useas all securities are entered in a bookentry mode.
In India, there are two depositories.National Securities DepositoriesLimited (NSDL) is the first and largestdepository presently operational inIndia. It was promoted as a jointventure of the IDBI, UTI, and theNational Stock Exchange.
The Central Depository ServicesLimited (CDSL) is the second depositoryto commence operations and waspromoted by the Bombay StockExchange and the Bank of India. Boththese national level depositories operatethrough intermediaries who areelectronically connected to thedepository and serve as contact pointswith the investors and are calleddepository participants.
The depository participant (DP)serves as an intermediary between theinvestor and the Depository (NSDL orCSDL) who is authorised to maintainthe accounts of dematerialised shares.Financial institutions, banks, clearingcorporations, stock brokers and non-banking finance corporations are
2015-16(21/01/2015)
FINANCIAL MARKET
283
permitted to become depositoryparticipants. If the investor is buyingand selling the securities through thebroker or the bank or a non-bankingfinance corporation, it acts as a DP forthe investor and complete the
formalities.
NNNNNATIONALATIONALATIONALATIONALATIONAL S S S S STOCKTOCKTOCKTOCKTOCK E E E E EXCHANGEXCHANGEXCHANGEXCHANGEXCHANGE OFOFOFOFOF I I I I INDIANDIANDIANDIANDIA
(NSE)(NSE)(NSE)(NSE)(NSE)
The National Stock Exchange is thelatest, most modern and technologydriven exchange. It was incorporated in1992 and was recognised as a stockexchange in April 1993. It startedoperations in 1994, with trading on thewholesale debt market segment.Subsequently, it launched the capitalmarket segment in November 1994 as atrading platform for equities andthe futures and options segment in June2000 for various derivative instruments.
NSE has set up a nationwide fullyautomated screen based trading system.
The NSE was set up by leadingfinancial institutions, banks, insurancecompanies and other financialintermediaries. It is managed byprofessionals, who do not directly orindirectly trade on the exchange. Thetrading rights are with the tradingmembers who offer their services to theinvestors. The Board of NSE comprisessenior executives from promoterinstitutions and eminent professionals,without having any representation fromtrading members.
OOOOOBJECTIVESBJECTIVESBJECTIVESBJECTIVESBJECTIVES OFOFOFOFOF NSE NSE NSE NSE NSE
NSE was set up with the followingobjectives:
a. Establishing a nationwide tradingfacility for all types of securities.
b. Ensuring equal access to investors all
Stock Market IndexStock Market IndexStock Market IndexStock Market IndexStock Market Index
A stock market index is a barometer of market behaviour. It measures overallmarket sentiment through a set of stocks that are representative of the market.It reflects market direction and indicates day-to-day fluctuations in stockprices. An ideal index must represent changes in the prices of securities andreflect price movements of typical shares for better market representation. Inthe Indian markets the BSE, SENSEX and NSE, NIFTY are important indices.Some important global stock market indices are:• Dow Jones Industrial Average is among the oldest quoted stock market
index in the US.
• NASDAQ Composite Index is the market capitalisation weightages of pricesfor stocks listed in the NASDAQ stock market.
• S and P 500 Index is made up of 500 biggest publicly traded companies inthe US. The S and P 500 is often treated as a proxy for the US stock market.
• FTSE 100 consists of the largest 100 companies by full market value listedon the London Stock Exchange. The FTSE 100 is the benchmark index ofthe European market.
2015-16(21/01/2015)
BUSINESS STUDIES
284
over the country through anappropriate communication network.
c. Providing a fair, efficient andtransparent securities marketusing electronic trading system.
d. Enabling shorter settlement cyclesand book entry settlements.
e. Meeting international benchmarksand standards.
Within a span of ten years, NSE hasbeen able to achieve its objectives forwhich it was set up. It has been playinga leading role as a change agent intransforming the Indian capital market.NSE has been able to take the stockmarket to the door step of the investors.It has ensured that technology has beenharnessed to deliver the services to theinvestors across the country at the lowestcost. It has provided a nation wide screenbased automated trading system with ahigh degree of transparency and equalaccess to investors irrespective ofgeographical location.
MMMMMARKETARKETARKETARKETARKET S S S S SEGMENTSEGMENTSEGMENTSEGMENTSEGMENTS OFOFOFOFOF NSE NSE NSE NSE NSE
The Exchange provides trading in thefollowing two segments.
(i) Whole Sale Debt Market Segment:
This segment provides a tradingplatform for a wide range of fixedincome securities that includecentral government securities,treasury bills, state developmentloans, bonds issued by publicsector undertakings, floating ratebonds, zero coupon bonds, indexbonds, commercial paper, certificateof deposit, corporate debenturesand mutual funds.
(ii) Capital Market Segment: The capitalmarket segment of NSE provides anefficient and transparent platform fortrading in equity, preference,debentures, exchange traded funds aswell as retail Government securities.
OOOOOVERVERVERVERVER THETHETHETHETHE C C C C COUNTEROUNTEROUNTEROUNTEROUNTER E E E E EXCHANGEXCHANGEXCHANGEXCHANGEXCHANGE OFOFOFOFOF I I I I INDIANDIANDIANDIANDIA
(OTCEI)(OTCEI)(OTCEI)(OTCEI)(OTCEI)
The OTCEI is a company incorporatedunder the Companies Act 1956. It wasset-up to provide small and mediumcompanies an access to the capitalmarket for raising finance in a costeffective manner. It was also meant toprovide investors with a convenient,
Some Common Stock Market TermsSome Common Stock Market TermsSome Common Stock Market TermsSome Common Stock Market TermsSome Common Stock Market Terms
You would have often come across the following terms in magazines or newspaperswhen you read about the stock market.
BOURSES is another word for the stock market
BULLS and BEARS – The term does not refer to animals but to market sentiment ofthe investors. A Bullish phase refers to a period of optimism and a Bearish phase toa period of perssimism on the Bourses.
BADLA – This refers to a carry forward system of settlement, particularly at the BSE.It is a facility that allows the postponement of the delivery or payment of a transactionfrom one settlement period to another.
ODD LOT TRADING – Trading in multiples of 100 stocks or less.
PENNY STOCKS – These are securities that have no value on the stock exchange butwhose trading contributes to speculation.
2015-16(21/01/2015)
FINANCIAL MARKET
285
transparent and efficient avenue forcapital market investment. It is fullycomputerised, transparent, singlewindow exchange ‘which commencedtrading in 1992. This exchange isestablished on the lines of NASDAQ(National Association of SecuritiesDealers Automated Quotations) theOTC exchange in USA. It has beenpromoted by UTI, ICICI, IDBI, IFCI, LIC,GIC, SBI Capital markets and CanBank Financial Services.
Over the counter market may bedefined as a place where buyers seeksellers and vice-versa and then attemptto arrange terms and conditions forpurchase/sale acceptable to both theparties. It is a negotiated market placethat exists any where as opposed to theauction market place, represented bythe activity on securities exchanges.Thus, in the OTC exchange, trading
takes place when a buyer or sellerwalks up to an OTCEI counter, taps onthe computer screen, finds quotes andeffects a purchase or sale dependingon whether the prices meet theirtargets. There is no particular marketplace in the geographical sense. Theobjectives of OTCEI are to providequicker liquidity to securities at afixed and fair price, liquidity for lesstraded securities or that of smallcompanies, a simplified process ofbuying and selling and easy andcheaper means of making public saleof new issues. However, the OTCEI hasnow been withdrawn.
Advantages of OTC MarketAdvantages of OTC MarketAdvantages of OTC MarketAdvantages of OTC MarketAdvantages of OTC Market
1. It provides a trading platform tosmaller and less liquid companiesas they are not eligible for listing ona regular exchange.
SENSEX — The Bombay Stock Exchange Sensitive IndexSENSEX — The Bombay Stock Exchange Sensitive IndexSENSEX — The Bombay Stock Exchange Sensitive IndexSENSEX — The Bombay Stock Exchange Sensitive IndexSENSEX — The Bombay Stock Exchange Sensitive Index
Have you counted the number of times newspaper headlines in the past fewweeks have been discussing the SENSEX? It goes up and down all the time andseems to be a very important part of business and economic news. Has thatmade you wonder what the SENSEX actually is?
The SENSEX is the benchmark index of the BSE. Since the BSE has been theleading exchange of the Indian secondary market, the SENSEX has been animportant indicator of the Indian stock market. It is the most frequently usedindicator while reporting on the state of the market. An index has just one job: tocapture the price movement. So a stock index will reflect the price movements ofshares while a bond index captures the manner in which bond prices go up ordown. If the SENSEX rises, it indicates the market is doing well. Since stocks aresupposed to reflect what companies expect to earn in the future, a rising indexindicates that investors expect better earnings from companies. It is also a measureof the state of the Indian economy. If Indian companies are expected to do well,obviously the economy should do well too.
The SENSEX, launched in 1986 is made up of 30 of the most actively tradedstocks in the market. In fact, they account for half the BSE’s market capitalisation.They represent 13 sectors of the economy and are leaders in their respectiveindustries.
2015-16(21/01/2015)
BUSINESS STUDIES
286
2. It is a cost effective method forcorporates as there is a lower costof new issues and lower expensesof servicing the investors.
3. Family concerns and closely heldcompanies can go public throughOTC.
4. Dealers can operate both in newissues and secondary market attheir option.
5. It gives greater freedom of choice toinvestors to choose stocks bydealers for market making in bothprimary and secondary markets.
6. It is a transparent system of tradingwith no problem of bad or shortdeliveries.
7. Information flows are free and moredirect from market makers tocustomers since there is closecontact between them.
BSE (BBSE (BBSE (BBSE (BBSE (BOMBAYOMBAYOMBAYOMBAYOMBAY S S S S STOCKTOCKTOCKTOCKTOCK E E E E EXCHANGEXCHANGEXCHANGEXCHANGEXCHANGE L L L L LTDTDTDTDTD.).).).).)
BSE Ltd (formerly known as BombayStock Exchange Ltd) was establishedin 1875 and was Asia’s first StockExchange. It was granted permanentrecognition under the SecuritiesContract (Regulation) Act, 1956. It hascontributed to the growth of thecorporate sector by providing aplatform for raising capital. It is knownas BSE Ltd but was established as theNative Share Stock Brokers Associationin 1875. Even before the actuallegislations were enacted, BSE Ltdalready had a set of Rules andRegulations to ensure an orderlygrowth of the securities market. As
discussed earlier, a stock exchange canbe set up as a corporate entity withdifferent individuals (who are notbrokers) as members or shareholders.BSE is one such exchange set up as acorporate entity with a broadshareholder base. It has the followingobjectives:
(a) To provide an efficient andtransparent market for trading inequity, debt instruments,derivatives, and mutual funds.
(b) To provide a trading platform forequities of small and mediumenterprises.
(c) To ensure active trading andsafeguard market integrity throughan electronically-driven exchange.
(d) To provide other services to capitalmarket participants, like riskmanagement, clearing, settlement,market data, and education.
(e) To conform to internationalstandards.
Besides having a nation-widepresence, BSE has a global reach withcustomers around the world. It hasstimulated innovation and competitionacross all market segments. It hasestablished a capital market institute,called the BSE Institute Ltd, whichprovides education on financialmarkets and vocational training to anumber of people seeking employmentwith stock brokers. The exchange hasabout 5000 companies listed from allover the country and outside, and hasthe largest market capitalisation in
India.
2015-16(21/01/2015)
FINANCIAL MARKET
287
SSSSSECURITIESECURITIESECURITIESECURITIESECURITIES ANDANDANDANDAND E E E E EXCHANGEXCHANGEXCHANGEXCHANGEXCHANGE B B B B BOARDOARDOARDOARDOARD OFOFOFOFOF
IIIIINDIANDIANDIANDIANDIA (SEBI) (SEBI) (SEBI) (SEBI) (SEBI)
The Securities and Exchange Board ofIndia was established by theGovernment of India on 12 April 1988as an interim administrative body topromote orderly and healthy growth ofsecurities market and for investorprotection. It was to function under theoverall administrative control of theMinistry of Finance of the Governmentof India. The SEBI was given a statutorystatus on 30 January 1992 throughan ordinance. The ordinance was laterreplaced by an Act of Parliament knownas the Securities and Exchange Boardof India Act, 1992.
Reasons for the Establishment ofReasons for the Establishment ofReasons for the Establishment ofReasons for the Establishment ofReasons for the Establishment ofSEBISEBISEBISEBISEBI
The capital market has witnessed atremendous growth during 1980’s,characterised particularly by theincreasing participation of the public.This ever expanding investorspopulation and market capitalisationled to a variety of malpractices on thepart of companies, brokers, merchantbankers, investment consultants andothers involved in the securities market.The glaring examples of thesemalpractices include existence of self –styled merchant bankers unofficialprivate placements, rigging of prices,unofficial premium on new issues, non-adherence of provisions of theCompanies Act, violation of rules andregulations of stock exchanges andlisting requirements, delay in deliveryof shares etc. These malpractices and
unfair trading practices have erodedinvestor confidence and multipliedinvestor grievances. The Governmentand the stock exchanges were ratherhelpless in redressing the investor’sproblems because of lack of properpenal provisions in the existinglegislation. In view of the above, theGovernment of India decided to set-upa separate regulatory body known asSecurities and Exchange Board ofIndia.
Purpose and Role of SEBIPurpose and Role of SEBIPurpose and Role of SEBIPurpose and Role of SEBIPurpose and Role of SEBI
The basic purpose of SEBI is to createan environment to facilitate efficientmobilisation and allocation of resourcesthrough the securities markets. It alsoaims to stimulate competition andencourage innovation. This environmentincludes rules and regulations,institutions and their interrelationships,instruments, practices, infrastructureand policy framework.
This environment aims at meetingthe needs of the three groups whichbasically constitute the market, viz,the issuers of securities (Companies),the investors and the marketintermediaries.
• To the issuers, it aims to provide amarket place in which they canconfidently look forward to raisingfinances they need in an easy, fairand efficient manner.
• To the investors, it should provideprotection of their rights andinterests through adequate,accurate and authentic informationand disclosure of information on acontinuous basis.
2015-16(21/01/2015)
BUSINESS STUDIES
288
• To the intermediaries, it should offera competitive, professionalised andexpanding market with adequateand efficient infrastructure so thatthey are able to render better serviceto the investors and issuers.
Objectives of SEBIObjectives of SEBIObjectives of SEBIObjectives of SEBIObjectives of SEBI
The overall objective of SEBI is toprotect the interests of investors and topromote the development of, andregulate the securities market. Thismay be elaborated as follows:1. To regulate stock exchanges and
the securities industry to promotetheir orderly functioning.
2. To protect the rights and interestsof investors, particularly individualinvestors and to guide and educatethem.
3. To prevent trading malpractices andachieve a balance between selfregulation by the securities industryand its statutory regulation.
4. To regulate and develop a code ofconduct and fair practices byintermediaries like brokers,merchant bankers etc., with a viewto making them competitive andprofessional.
Functions of SEBIFunctions of SEBIFunctions of SEBIFunctions of SEBIFunctions of SEBI
Keeping in mind the emerging natureof the securities market in India, SEBIwas entrusted with the twin task ofboth regulation and development of thesecurities market. It also has certainprotective functions.
Regulatory FunctionsRegulatory FunctionsRegulatory FunctionsRegulatory FunctionsRegulatory Functions
1. Registration of brokers and sub-
brokers and other players in themarket.
2. Registration of collective investmentschemes and Mutual Funds.
3. Regulation of stock brokers, portfolioexchanges, underwriters andmerchant bankers and the businessin stock exchanges and any othersecurities market.
4. Regulation of takeover bids bycompanies.
5. Calling for information by under-taking inspection, conductingenquiries and audits of stockexchanges and intermediaries.
6. Levying fee or other charges forcarrying out the purposes of the Act.
7. Performing and exercising suchpower under Securities Contracts(Regulation) Act 1956, as may bedelegated by the Government ofIndia.
Development FunctionsDevelopment FunctionsDevelopment FunctionsDevelopment FunctionsDevelopment Functions
1. Training of intermediaries of thesecurities market.
2. Conducting research andpublishing information useful to allmarket participants.
3. Undertaking measures to developthe capital markets by adapting aflexible approach.
Protective FunctionsProtective FunctionsProtective FunctionsProtective FunctionsProtective Functions
1. Prohibition of fraudulent and unfairtrade practices like making mis-leading statements, manipulations,price rigging etc.
2. Controlling insider trading andimposing penalties for suchpractices.
2015-16(21/01/2015)
FINANCIAL MARKET
289
3. Undertaking steps for investorprotection.
4. Promotion of fair practices and codeof conduct in securities market.
The Organisation Structure of SEBIThe Organisation Structure of SEBIThe Organisation Structure of SEBIThe Organisation Structure of SEBIThe Organisation Structure of SEBI
As SEBI is a statutory body there hasbeen a considerable expansion in therange and scope of its activities. Each ofthe activities of the SEBI now demandsmore careful, closer, co-ordinated andintensive attention to enable it to attainits objectives. Accordingly, SEBI hasbeen restructured and rationalised intune with its expanded scope. It hasdecided its activities into five operationaldepartments. Each department isheaded by an executive director. Apartfrom its head office at Mumbai, SEBI hasopened regional offices in Kolkalta,Chennai, and Delhi to attend to investorcomplaints and liaise with the issuers,
intermediaries and stock exchanges inthe concerned region.
The SEBI also formed two advisorycommittees. They are the PrimaryMarket Advisory Committee and theSecondary Market AdvisoryCommittee. These committees consistof the market players, the investorsassociations recognised by the SEBIand the eminent persons in the capitalmarket. They provide important inputsto the SEBI’s policies.
The objectives of the twoCommittees are as follows:
a. To advise SEBI on matters relatingto the regulation of intermediariesfor ensuring investors protection inthe primary market.
b. To advise SEBI on issues related tothe development of primary marketin India.
SEBI ViolationsSEBI ViolationsSEBI ViolationsSEBI ViolationsSEBI Violations
SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’sInitial Public Offering (IPO) where a few investors opened over 14,000dematerialised accounts to corner large number of shares of the company.
This is the second such incident, after a similar such violations weredetected in the YES Bank’s IPO.
SEBI said in IDFC’s IPO too four investors opened as many as 14,807dematerialised accounts with Karvy-DP and ‘Strangely’, all these accountholders have their bank accounts with Bharat Overseas Bank Ltd.,Ahmedabad.
SEBI order said: “Further probe is required for examining the systemicfault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd.,and the lead managers Kotak Mahindra Capital Company Ltd., DSP MerrillLynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out thebenami applications.”Reference is being made to the RBI to examine the role of BOB, HDFC Bank,Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening thebank accounts of these benami entities and apparently funding them.
Source: The Economic TimesSource: The Economic TimesSource: The Economic TimesSource: The Economic TimesSource: The Economic Times
2015-16(21/01/2015)
BUSINESS STUDIES
290
KKKKKEYEYEYEYEY T T T T TERMSERMSERMSERMSERMS
Financial Market Money Market Treasury Bills
Commercial Paper Call Money Certificate of DepositCommercial Bill Money Market Mutual Fund CapitalMarket Primary Market Secondary MarketStock Exchange SEBI, NSE OTCEI
SUMMARYSUMMARYSUMMARYSUMMARYSUMMARY
Financial MarketFinancial MarketFinancial MarketFinancial MarketFinancial Market is a market for creation and exchange of financial assets. Ithelps in mobilisation and channelising the savings into most productive uses.Financial markets also helps in price discovery and provide liquidity tofinancial assets.
Money MarketMoney MarketMoney MarketMoney MarketMoney Market is a market for short-term funds. It deals in monetory assetswhose period of maturity is less than one year. The instruments of money marketincludes treasury bills, commercial paper, call money, Certificate of deposit,commercial bills, participation certificates and money market mutual funds.
Capital MarketCapital MarketCapital MarketCapital MarketCapital Market is a place where long-term funds are mobilised by the corporateundertakings and Government. Capital Market may be devided into primarymarket and secondary market. Primary market deals with new securities whichwere not previously tradable to the public. Secondary market is a place whereexisting securities are bought and sold.
Stock ExchangesStock ExchangesStock ExchangesStock ExchangesStock Exchanges are the organisations which provide a platform for buyingand selling of existing securities. Stock exchanges provide continuous marketfor securities, helps in price discovery, widening share ownership and providescope for speculation.
The National Stock Exchange of India is the latest, most modern and technologydriven exchange and was incorporated in 1992. OTCEI was incorporated in
c. To advise SEBI on disclosurerequirements for companies.
d. To advise for changes in legalframework to introducesimplification and transparency inthe primary market.
e. To advise the board in mattersrelating to the development andregulation of the secondary market
in the country.
The committees are however non-statutory in nature and the SEBI is notbound by the advise of the committee.These committees are a part of SEBI’sconstant endeavor to obtain a feedbackfrom the market players on variousissues relating to the regulations anddevelopment of the market.
2015-16(21/01/2015)
FINANCIAL MARKET
291
1992 to provide listing facility for small companies with paid up capital of lessthan 3 crores.
Securities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSecurities and Exchange Board of IndiaSecurities and Exchange Board of India was established in 1988 and wasgiven statutory status through an Act in 1992. The SEBI was set-up to protectthe interests of investors, development and regulation of securities market.
EXERCISESEXERCISESEXERCISESEXERCISESEXERCISES
Multiple choice questionsMultiple choice questionsMultiple choice questionsMultiple choice questionsMultiple choice questions
1. Primary and secondary markets:
a. Compete with each other
b. Complement each other
c. Function independently
d. Control each other
2. The total number of Stock Exchanges in India is:
a. 20 b. 21 c. 22 d. 23
3. The settlement cycle in NSE is:
a. T + 5 b. T + 3 c. T + 2 d. T+1
4. The National Stock Exchange of India was recognized as stock exchange inthe year:
a. 1992 b. 1993 c. 1994 d. 1995
5. NSE commenced futures trading in the year:
a. 1999 b. 2000 c. 2001 d. 2002
6. Clearing and settlement operations of NSE are carried out by:
a. NSDL b. NSCCL c. SBI d. CDSL
7. OTCEI was started on the lines of:
a. NASDAQ b. NYSE c. NASAQ d. NSE
8. To be listed on OTCEI, the minimum capital requirement for a company is:
a. Rs. 5 crores b. Rs. 3 crores c. Rs. 6 crores d. Rs. 1 crore
9. A Treasury Bill is basically:
a. An instrument to borrow short-term funds
b. An instrument to borrow long-term funds
c. An instrument of capital market
d. None of the above
2015-16(21/01/2015)
BUSINESS STUDIES
292
Short answer questionsShort answer questionsShort answer questionsShort answer questionsShort answer questions
1. What are the functions of a financial market?
2. “Money Market is essentially a Market for short term funds.” Discuss.
3. What is a Treasury Bill ?
4. Distinguish between Capital Market and Money Market.
5. What are the functions of a Stock Exchange?
6. What are the objectives of the SEBI?
7. State the objectives of the NSE.
8. What is the OTCEI?
LongLongLongLongLong-----answer questionsanswer questionsanswer questionsanswer questionsanswer questions
1. Explain the various Money Market Instruments.
2. What are the methods of floatation in Primary Market?
3. Explain the recent Capital Market reforms in India.
4. Explain the objectives and functions of the SEBI
5. Explain the various segments of the NSE.
Projects and AssignmentsProjects and AssignmentsProjects and AssignmentsProjects and AssignmentsProjects and Assignments
1. Collect the information about the companies that have recently mobilisedresources through primay market.
2. Collect the information on various measures taken by SEBI to protect theinterests of investors since its inception.
3. Send a group of students to a trading terminal in your city to gain first handinformation on securities trading and prepare a report.
4. Collect data about the movements in SENSEX and NIFTY during the lastone month. Find out whether the two move in same or opposite direction.
5. Collect information about the SEBI action for Investor Protection taken duringlast two years.
6. Collect information about e-IPO’s in the Indian Market in the last one year.
TRY AND SOLVE THE CROSSWORDTRY AND SOLVE THE CROSSWORDTRY AND SOLVE THE CROSSWORDTRY AND SOLVE THE CROSSWORDTRY AND SOLVE THE CROSSWORD
Clues to the Clues to the Clues to the Clues to the Clues to the CrosswordCrosswordCrosswordCrosswordCrossword
AcrossAcrossAcrossAcrossAcross
1. Commission Agent who transacts in securities on behalf of non membersor members (6).
2. Changes in the price of securities in the stock market. (12)
4. Inclusion of securities in the official trade list of securities in stock market (7)
8. Place of trade I securities (6)
9. Result of selling shares at a price lower than the purchase price. (4)
2015-16(21/01/2015)
FINANCIAL MARKET
293
13. An independent dealer in securities (6)
15. Includes shares, scripts, bonds, debentures (10)
16. Speculator who expects the prices to go down (4)
17. Buying and selling of securities to manipulate the market (7)
18. Speculator who deals in new securities only (4)
DownDownDownDownDown
1. Speculator expecting a rise in the prices (4)
3. Means ‘with’ (3)
5. Means a part or fraction of capital (6)
6. Fraction of profit paid to government (3)
7. Illegal, game based on chance (8)
9. Official statement of securities in the stock market (5)
10. Those who buy and sell securities with objective of profit (10)
11. Money invested in business (7)
12. Return on shares out of profits (8)
14. Instrument acknowledging a debt (9)
16. Govt. document acknowledging a debt (5)
19. Profit or yield (4)
2015-16(21/01/2015)
BUSINESS STUDIES
294
Case Problem ICase Problem ICase Problem ICase Problem ICase Problem I
‘R’ Limited is a real estate company which was formed in 1950. In about 56years of its existence the company has managed to carve out a niche for itself inthis sector. Lately, this sector is witnessing a boom due to the fact that the Indianeconomy is on the rise. The incomes of middle class are rising. More people canafford to buy homes for themselves due to easy availability of loans andaccompanying tax concessions.
To expand its business in India and abroad the company is weighing variousoptions to raise money through equity offerings in India. Whether to tap equity ordebt. market whether to raise money from domestic market or international marketor Combination of both? Whe their to raise the necessary financé from moneymarket or capital market. It is also planning to list itself in New York Stock Exchangeto raise money through ADR’s. To make its offerings attractive it is planning tooffer host of financial plans products to its stakeholders and investors and alsoexpand it’s listing at NSE after complying with the regulations of SEBI.
(i) What benefits will the company derive from listing at NSE?
(ii) What are the regulations of SEBI that the company must comply with?
(iii) How does the SEBI exercise control over ‘R’ Limited in the interest ofinvestors?
Case Problem IICase Problem IICase Problem IICase Problem IICase Problem IINSE IndicesNSE IndicesNSE IndicesNSE IndicesNSE Indices World MarketsWorld MarketsWorld MarketsWorld MarketsWorld Markets
Index Current Prev. %CHG Index Current Prev. % Change
S&P CNX Nifty 3641.1 3770.55 -3.43% NYSE Composite 8926.88 9120.93 -2.13%
CNX Nifty Junior 6458.55 6634.85 -2.66% NASDAQ Composite 2350.57 2402.29 -2.15%
CNX IT 5100.5 5314.05 -4.02% DOW Jones I. A. 12076 12318.6 -1.97%
Bank Nifty 5039.05 5251.55 -4.05% S&P 500 1377.95 1406.6 -2.04%
CNX 100 3519.35 3640.35 -3.32% Nikkei 225 16676.9 17178.8 -2.92%
More
Source: www.nseindia.comSource: www.nseindia.comSource: www.nseindia.comSource: www.nseindia.comSource: www.nseindia.com
The above figures are taken from the website of national stock exchange ofIndia. They illustrate the movement of NSE stock indices as well as world stockindices on the date indicated.
QuestionsQuestionsQuestionsQuestionsQuestions
1. What do you mean by a stock index? How is it calculated?
2. What conclusions can you draw from the various movements of NSE stockindices?
3. What factors affect the movement of stock indices? Elaborate on the natureof these factors.
2015-16(21/01/2015)
FINANCIAL MARKET
295
4. What relationship do you see between the movement of indices in worldmarkets and NSE indices?
5. Give details of all the indices mentioned above. You can find information onthe web or business magazines.
(The teacher should help the students in answering these questions. Theycan look at the website mentioned above and also website of SEBI, i.e.,www.sebi.gov.in for educational material. This exercise will help the studentsin understanding the stock markets clearly and also create interest therein.)
Project WorkProject WorkProject WorkProject WorkProject Work
1. Study the wwebsite of Mumbai Stock Exchange, i.e., www.bseindia.com andcompile information which you find useful. Discuss it in your class and findout how it can help you should you decide to invest in the stock market.Prepare a report on your findings with the help of your teacher.
2. Prepare a report on the role of SEBI in regulating the Indian stock market.You can get this information on its website namely www.sebi.gov.in. Do youthink something else should be done to increase the number of investors inthe stock market?
Answers to the CrosswordAnswers to the CrosswordAnswers to the CrosswordAnswers to the CrosswordAnswers to the Crossword
AcrossAcrossAcrossAcrossAcross 1. Broker 2. Fluctuations 4. Listing 8. Market 9. Loss
13. Jobber 15. Securities 16. Bear 17. Rigging 18. Stag
DownDownDownDownDown 1. Bull 3. Cum 5. Stocks 6. Tax 7. Gambling
9. Lists 10. Speculator 11. Capital 12. Dividend 14. Debenture
16. Bonds 19. Gain
2015-16(21/01/2015)
