Project-study of Stock Exchanges

8/8/2019 Project-study of Stock Exchanges

1/35

Short Project

On

Study of stock exchange in India

Presented By:

Merwin Arun Alva

*Index of content *

Study of stock exchange In India Merwin Alva


2/35

I. Introduction

II. Review of literature.

1. The Importance of Stock Exchanges

2. Stock Trading.

Stock Specialists and the Exchange loor

loor !rokers.

Institutional !rokers.

". Trading in other securities.

#onds.

$ptions.

utures.

%. Stock Exchanges in India.

&. Evolution of Stock Exchanges in India.

'. Stud( of Indian )arket.

Sensex )ilestones.

Sensex alls.

. +,-ERSE#I /Surve( of Indian Investors0

III. $!ective of stud(

I. Scope of stud(.



3/35

3I4I+TR$56,TI$+7

Stock Exchange organized market for buying and selling financial instruments, including stocks, otions,and futures! Most stock exchanges have secific locations where commissioned, or aid, intermediariescalled 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 secific central trading location! Stocks are shares of ownershiin comanies!

Ma"or stock exchanges in the #nited States include the $ew %ork Stock Exchange &$%SE' and theAmerican Stock Exchange &AME(', both in $ew %ork )ity! A ma"or stock exchange in India is *ombayStock Exchange &*SE' and the $ational Stock Exchange &$SE'! In addition, most of the world+sindustrialized nations have stock exchanges! Among the larger International Exchanges are those in ondon,England, -aris, .rance, Milan, Italy, /ong 0ong, )hina, and 1okyo, 2aan!

)ain financial products8instruments dealt in the secondar( market

3 E9uit(7 1he ownershi interest in a comany of holders of its common and -referred stock! 1he variouskinds of e4uity shares are as follows

E9uit( Shares7

3 An e4uity share, commonly referred to as ordinary share also reresents the form of fractional ownershi inwhich a shareholder, as a fractional owner, undertakes the maximum entrereneurial risk associated with a

business venture! 1he holders of such shares are members of the comany and have voting rights! Acomany may issue such shares with differential rights as to voting, ayment of dividend, etc!

3 Rights Issue8 Rights Shares7 1he issue of new securities to existing shareholders at a ratio to those

already held!

3 #onus Shares5 Shares issued by the comanies to their shareholders free of cost by caitalization ofaccumulated reserves from the rofits earned in the earlier years!

3 :referred Stock8 :reference shares5 6wners of these kind of shares are entitled to a fixed dividend ordividend calculated at a fixed rate to be aid regularly before dividend can be aid in resect of e4uity share!1hey also en"oy riority over the e4uity shareholders in ayment of surlus! *ut in the event of li4uidation,their claims rank below the claims of the comany+s creditors, bondholders 7 debenture holders!

3 ,umulative :reference Shares7 A tye of reference shares on which dividend accumulates if remains

unaid! All arrears of reference dividend have to beaid out before aying dividend on e4uity shares!

3 ,umulative ,onverti!le :reference Shares7 A tye of reference shareswhere the dividend ayable on the same accumulates, if not aid! After asecified date, these shares will be converted into e4uity caital of the comany!

3 :articipating :reference Share7 1he right of certain reference shareholders to articiate in rofits aftera secified fixed dividend contracted for is aid! -articiation right is linked with the 4uantum of dividend

aid on the e4uity shares over and above a articular secified level!



4/35

3 Securit( Receipts7 Security receit means a receit or other security, issued by a securitisation comany orreconstruction comany to any 4ualified institutional buyer ursuant to a scheme, evidencing the urchase orac4uisition by the holder thereof, of an undivided right, title or interest in the financial asset involved insecuritisation!

3 ;overnment securities 2= #6@@ A *ull is a dealer on a stock exchange, currency or a commodity market, who exects rices to9ISE! A bull market is one in which a dealer is more likely to be a buyer than a seller, even to the extent of



5/35

buying for his or her account and establishing a bull osition! A bull osition hoes to sell the urchases at ahigher rice after the market has risen! A bull osition or long osition occurs when the bull owns securities

"= A$##ER ?A "obber is an indeendent dealer in securities! /e urchases and sells securities in his ownname! /e is not allowed to deal with non8 members directly!

%= ,BI,CE+)hickens are afraid to lose anything !1heir fear overrides their need to make rofits and sothey turn only to money8market securities or get out of the markets altogether! @hile it+s true that you should

never invest in something over which you lose your slee, you are also guaranteed never to see any return ifyou avoid the market comletely and never take any risk!

&= :I; ?-igs are high risk investors looking for the one *I:+ score in a short eriod of time! -igs buy onhot tis and invest in comanies in comanies without doing their due diligence! -igs get imatient, greedy,and emotional about their investment, and they are drawn to high8risk securities without utting roer timeor money to learn about these investment vehicles! -rofessional traders love igs, as it is often from theirlosses that the bulls and bears rea their rofits!

B' ST-; ?A stag is a seculator who buys a large amount of shares in a new issue of shares &like an I-68

Initial -ublic 6ffer'if he thinks the rice is likely to rise above the offer rice when trading in the scribegins on the stock exchange ! A stag indulges in this kind of seculation with the hoe to sell soon at rofit!

Stock ,ertificate from the 1Dth ,entur(

1his hoto shows a stock certificate issued in ?CBD by the 6ctoroon :old and Silver Mining)omany of $evada! 1he certificate indicates that its bearer owns ?>>> shares of stock in thecomany, each valued at ?>>!



6/35

3II4Review of literature.

314The Importance of Stock Exchanges

Stock exchanges serve imortant roles in national economies! 1hey encourage investment by roviding

laces for buyers and sellers to trade securities, stocks, bonds, and other financial instruments! )omaniesissue stocks and bonds to obtain caital to exand their business!

)ororations issue new securities in the rimary market &as oosed to the secondary market, wheresecurities are bought and sold', usually with the hel of investment bankers! In the rimary market,cororations receive the roceeds of stock sales! 1hereafter, they are not involved in the trading of stocks!6wners of stocks trade them on a stock exchange in the secondary market!

In the secondary market, investors, not comanies, earn the rofits or bear the losses resulting fromtheir trades! Stock exchanges encourage investment by roviding this secondary market! *y allowing

investors to sell securities, exchanges increase the safety of investing!

Stock exchanges also encourage investment in other ways! 1hey rotect investors by uholding rulesand regulations that ensure buyers will be treated fairly and receive exactly what they ay for! Exchangesalso suort state8of8the8art technology and the business of brokering, which both hel traders to buy andsell securities 4uickly and efficiently!

!

324 Stock Trading

Stocks are shares of ownershi in comanies! -eole who buy a comany+s stock are entitled to dividends,or shares of any rofits! A comany can list its stock on only one ma"or stock exchange, though otions onits stock may be traded on another! Each exchange establishes re4uirements that a comany must meet tohave its stock listed! 1he different exchanges tend to attract different kinds of comanies! Smaller exchangestyically trade the stock of small, emerging businesses, such as high8tech comanies! In the #nited States,the AME( lists small8 to medium8sized businesses, including many oil and gas comanies! 1he $%SE

rimarily lists large, established comanies!

Stock brokers must be registered with the exchange in which they trade! Most brokers belong tobrokerage firms! *rokerage firms maintain staffs of many brokers, each of whom has exerience in thetrading of securities of certain comanies or those of articular economic sectors, high tech, utilities, ortransortation businesses, for instance! *rokerage firms also tend to trade in the stocks of secificcomanies, and therefore kee inventories of the stocks of those comanies! 1o become a member of anexchange, a firm must register its brokers by buying seats for them! A seat is simly a right to trade on anexchange! Member firms have the right to vote on exchange olicy and must also arbitrate in disutes amongcustomers! In larger exchanges, seats may sell for several hundreds of thousands of dollars! Exchangesattract larger or smaller brokerage firms deending on how high or low their fees are!



7/35

*rokerage firms that ay high membershi fees to exchanges like the $%SE have the oortunity tomake large rofits trading in the stock of very successful businesses! 1hey also risk losing large amounts,and therefore charge their clients higher rices than do smaller firms! In art, large comanies use large

brokerage firms and list on large exchanges because of the otential losses ossible to those trading theirsecurities!

3-4Stock Specialists and the Exchange loor

At a stock exchange, certain brokers secialize in trading certain stocks! 1hese secialists oerate on thefloor of the exchange, the area where all trading takes lace! 1he floor of the $%SE, for examle, is anenormous room that measures about D> by FB by GH m high &about ?>> by ?CD by = ft high'! *rokers ackthe floor during trading! 1hey often use bargaining and negotiation to execute larger trades, and they take

bids for the highest rices! 1he rocess is noisy and frantic, and brokers use hand signals to communicateabove the chaos! In #!S! exchanges, only trades over ?G>> shares are negotiated on the floor! In smallertrades, orders commonly go to secialist brokers directly via comuter!

1he rocess is noisy and frantic, and brokers use hand signals to communicate above the chaos!

Secialists sometimes act as dealersJinstead of as intermediaries, or brokersJtrading directly in the stocksof their firms+ accounts! .or this reason, they are also known as broker8dealers! 1hey do this when markettrends favour the trading of certain stocks and investors have not ordered enough trades to clear the market,or balance suly and demand! .loor traders always trade only in stocks owned by their brokerage firms andnever act as intermediaries!

3#4 loor #rokers

6ther brokers, called floor brokers &not the same as floor traders', do not act as secialists! 1hey insteadhandle large orders to buy or sell stocks of secific comanies! )lients lace such orders with brokeragefirms, who then contact their floor brokers! After receiving orders, floor brokers take them to secialists toarrange the trades! .loor and secialist brokers negotiate trades as reresentatives of clients and comanies!In smaller trades, orders commonly go directly to secialist brokers via comuter!

3,4 Institutional #rokers

Institutional brokers secialize in bulk urchases of securities, including bonds, for institutional investors!Institutional brokers generally charge their clients a lower fee er unit than do brokers who trade forindividual investors!

3"4 TR-5I+; I+ $TBER SE,6RITIES



8/35

3-4 #onds

*onds rovide a way for comanies to borrow money! -eole who invest in bonds are lending money to acomany in return for yearly interest ayments! *onds are traded searately from stocks on exchanges! Most

bonds are bought in large 4uantities by institutional investorsJlarge investors such as banks, ension funds,or mutual funds!

3#4 $ptions

6tions are traded on many #!S! stock exchanges, as well as over the counter! 6tions writers offerinvestors the rights to buy or sellJat fixed rices and over fixed time eriodsJsecified numbers of sharesor amounts of financial or real assets! @riters give call otions to eole who want otions to buy! A callotion is the right to buy shares or amounts at a fixed rice, within a fixed time san! )onversely, writersgive ut otions to eole who want otions to sell! A ut otion is the right to sell shares or amounts at a

fixed rice, within a fixed time san! *uyers may or may not ot to buy, or sellers to sell and they may rofitor lose on their transactions, deending on how the market moves! In any case, otions traders must ay

remiums to writers for making contracts! 1raders must also ay commissions to brokers for buying andselling stocks on exchanges! 6tions trading are also handled by otions clearing cororations, which areowned by exchanges! 6tion &finance'!

3,4 utures

.utures contracts are also traded on certain #!S! exchanges, most of which deal in commodities such asfoods or textiles! .utures trading works somewhat like otions trading, but buyers and sellers instead agreeto sales or urchases at fixed rices on fixed dates! After contracts are made, the choice to buy or sell is nototional! .utures contracts are then traded on the exchanges! )ommodities brokers handle this trading!.utures and otions traders often "udge markets trends by monitoring comiled indexes and averages ofstocks, usually organized by industry or market ranking! Among the most closely watched #!S! indexes arethe C, it was originally called the $ew %ork )urb Agency because of its origins onthe streets of $ew %ork )ity! It was renamed in ?=FD!

3%4TBE ST$,C E,B-+;ES I+ I+5I-



9/35

1. Ahmedabad Stock Exchange Association td A/ME


10/35

2. *angalore Stock Exchange *A$:A69E, 0A9$A1A0A5 8 *angalore Stock Exchange &*gSE' startedfunctioning from ?=BD and it is currently the largest stock exchange in South India! 1here are F=F listedcomanies with more than D>> non8regional comanies in it! 6ver F>>> comanies from listed and

ermitted category can be traded at the exchange at resent!*angalore Stock Exchange is managed by the )ouncil of Management which consists of

members being nominated by SE*I, ublic reresentatives, elected members and Executive


11/35

7. >>, the exchange had a total of D?> brokers, out of which ?>Gwere cororate brokers! Among D?> brokers, it was further classified as G>G rorietor brokers, B artnershi

brokers and ?>G cororate brokers! 1hen, there was only ?=C sub8brokers registered! According to therovision of the Securities )ontracts &9egulation' Act, it is now cororatized and de8mutualised! SE*I hasaroved the scheme in Setember, G>>F!Among other things, the scheme rovides for the re8registration of the exchange as a comany limited by,the segregation of ownershi and management from the trading rights of members, restrictions on votingright of shareholders who are also trading member, comosition of the :overning *oard, etc

10. 2aiur Stock Exchange td8 2AI-#9, 9A2AS1/A$5 82aiur Stock Exchange is the third largest exchange inIndia in terms of membershi! It was established in the year ?=C=! In the same year, the exchange wasgranted recognition in the month of 2anuary and the commencement of business took lace from the monthAugust, ?=C=! @ithin seven years of its incororation, i!e! by 2anuary;=B, the exchange managed to attractF> comanies who were listed on the exchange! 1hen the volume of the daily turnover rose to an average of9s!C> million!2aiur Stock Exchange was one of the ?F regional Stock Exchanges which romoted the Inter8connectedStock Exchange of India td! by aying the Initial )aital of 9s!?crore &9s!Flakhs as admission fee and9s!=Flakhs as infrastructure fee'!

11. udhiana Stock Exchange Association td #>L owned subsidiary of theexchange! 1he SE Securities got the ticket as sub8broker of the $SE! In ?==C, the exchange also got



12/35

ermission to start derivative trading! .or the settlement of dematerialised securities, the udhiana StockExchange has also been linked u with $ational Securities when the exchange had ?>> members! 1he boom eriod of the exchange faded out and the membershiwas reduced to only D by ?=GD! :ood days returned back in Setember, ?=D and the exchange was onceagain organised as Madras Stock Exchange Association &-vt!' imited catered to mills and lantations in thearea! In ?=F, the name was again changed to Madras Stock Exchange imited! 6n August G?, ?==C, the exchange was aroved with S:. Schemes by SE*I! @ith a ale shadowin the ast! Madras Stock Exchange managed to have a turnover of 9s!?>= crores in the year G>>?.

13. Madhya -radesh Stock Exchange td8I$


13/35

17. 61) Exchange of India M#M*AI, MA/A9AS/19A5 8 6ver8the8)ountry Exchange of India &61)EI'was incororated in the year ?==> as a Section GF comany under the )omanies Act ?=FB! It is recognised

by the Securities )ontracts 9egulation Act, ?=FB as a stock exchange! 1he urose of the formation of61)EI was to aid enterrising romoters in raising finance for new ro"ects in a cost effective manner andto rovide transarent and efficient mode of trading to the investors!It is modelled along the lines of the $AS at resent! 1he membershi isoen to comanies even beyond the territories of #ttar -radesh!

)urrently, the exchange has CHD listed comanies with a total caitalisation of 9s!C??CH crores! 1he annualturnover of the exchange for three consecutive years are as follows5?==C8== 5 ?CHG= )rores?===8G>>> 5 GDCB )roresG>>>8>? 5 GF??G )rores!

20. Oadodara Stock Exchange td OA


14/35

1hough many other exchanges exist, *SE and the$ational Stock Exchange of Indiaaccount for most of thetrading in shares in India!

3&4Evolution of Stock Exchanges in India

1he origin of the stock market relates back to the year ?H=H, when the Amsterdam Stock Exchange was setu! In India it dates back to the ?Cth)entury, an era when the East India )omany was a dominantinstitution in India!

Q1he *ombay Stock ExchangeR&*SE' was founded in the year ?CF! Q1he Ahmedabad Sharesand Stock AssociationR was formed in the year ?C=H! 1he )alcutta Stock Exchange Association was formed

by about ?F> brokers on ?Fth2une ?=>C!

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


15/35

In the %ear ?=G>, one stock exchange was established in $orthern India and one in Madras )alledQ1he Madras Stock ExchangeR! Q1he Madras Stock Exchange Association -vt! tdR was established in theyear ?=H?! 6n G=thAril, ?=F=, it was reorganized as a )omany limited by guarantee under the name andstyle of QMadras Stock ExchangeR &MSE'! 1he ahore Stock Exchange was formed in the year ?=DH!/owever, in the year ?=DB after the -un"ab Stock Exchange td! )ame into existence, the ahore StockExchange merged with it! In )alcutta, a second Stock Exchange by name Q1he *engal Share K StockExchange tdR was established in the year ?=D and likewise once again in the year ?=DC, *ombay also

witnessed a rival Stock Exchange formed in the name of QIndian Stock Exchange td!R 1he #!-!StockExchange was formed in 0anur and the $agur Stock Exchange td! In $agur in the year ?=H>! 1he/yderabad Stock Exchange td! @as incororated in the year ?=HH! 1wo stock exchanges which came into

being in


16/35

Stock .utures and 6tions

Stock .utures and the stock otions have the normal characteristics as any other stock future orotion traded by them where the underlying asset is some stock! E4uity .utures and 6tions5 1he *ombayStock Exchange also introduced the E4uity .utures and 6tions!

eaving aside the *SE Sensex there are many other indices that are used by the *ombay StockExchange and they are as follows5

*SE F>> *SE ?>> *SE G>> *SE -S# *SE MI


17/35

issue mainly debt and e4uity instruments and the government &central as well as state' who issue debtsecurities &dated securities and treasury bills'!

1he secondary market enables articiants who hold securities to ad"ust their holdings inresonse to changes in their assessment of risks and returns! 6nce the new securities are issued in the

rimary market they are traded in the stock &secondary' market! 1he secondary market oerated through twomediums, namely, the over8the8)ounter &61)' market and the exchange8traded market! 61) markets areinformal Markets where trades are negotiated! Most of the trades in the government securities are in the61) market! All the sot trades where securities are traded for immediate delivery and ayment take lacein the 61) market! All the sot trades where securities are traded for immediate delivery and ayment take

lace in the 61) market! All the sot trades where securities are traded for immediate delivery and aymenttake lace in the 61) Market! 1he other otion is to trade using the infrastructure rovided by the stockExchanges! 1here are GD exchanges in India and all of them follow a systematic settlement eriod! All thetrades taking lace over a trading cycle &day1' are settled together after a certain time &1TG day'! 1hetrades executed on the $ational Stock Exchange &$SE' are cleared and settled by a clearing cororation! 1heclearing cororation acts as a counterarty and guarantees settlement! $early ?>>L of the trades in caitalmarket segment are settled through demat delivery! $SE also rovides a formal trading latform for trading

of a wide range of debt securities, including government securities! A variant of the secondary market is theforward market, where securities are traded for future delivery and ayment! A variant of the forward marketis .utures and 6tions market resently only two exchanges viz!, $SE and Stock Exchange, Mumbai &*SE'

rovides trading in the derivatives of securities!

International Scenario

.ollowing the imlementation of reforms in the securities industry during the last decade, Indian stockmarkets! As may be seen out in the world ranking as well as in the >H' and ?Cthin terms of total value traded in stockexchanges and G>thterms of turnover ratio as on >F! >8>C, $SEreorted a turnover of 9s!D, FF?,>DC crores in the e4uities segment! ?== comanies have used the on8lineI-6 system of $SE by the end of March G>>!

A comarative study of concentration of market indices and indices stocks in >D to H!DG trillion in G>>F! It is significant to note that #S alone accounted for about HF!HBLof worldwide turnover in G>>F!


18/35

Accounted for a merger >!=HL in total world turnover in G>>F!1he market caitalization of all listedcomanies taken together on all markets stood at #S HD!BH trillion in G>>F &DC!=> trillion in G>>H'! 1heshare of #S in worldwide market caitalization decreased .rom H?!=BL as at end8G>>H to DC!=FL in end8G>>F, while Indian listed comanies

Accounted for ?!GL of total market caitalization in G>>F1here has also been an increase in marketcaitalization as er cent of :


19/35

The #om!a( Stock Exchange is the largest of IndiaGs more than 2H stock exchanges. ounded in 1&J

it is the oldest stock exchange in -sia

T BERE -RE TK$ TF:ES $ )-RCETS I+ I+5I-

1= )$+EF )-RCETMoney market is a market for debt securities that ay off in the short term usually less 1han one year, forexamle the market for =>8days treasury bills! 1his market encomasses the trading and issuance of shortterm non e4uity debt instruments including treasury bills, commercial aers, bankers accetance,certificates of


20/35

traded amongst investors! Secondary market could be either auction or dealer market! @hile stock exchangeis the art of an auction market, 6ver8the8)ounter &61)' is a art of the dealer market! In addition to thetraditional sources of caital from family and friends, start8u firms are created and nurtured by Oenture)aital .unds and -rivate E4uity .unds! According to the Indian Oenture )aital Association %earbook&G>>D', investments of CC? Million were in"ected into C> comanies in G>>G, and investments of H>million were in"ected into FB comanies in G>>D! 1he firms which received these investments were drawnfrom a wide range of industries, including finance, consumer goods and health!-ro"ects, 1hesis,


21/35

G>>>8 2anuary ?F, ?==G 8 6n 2anuary ?F, ?==G, the Sensex crossed the G,>>>8mark and closed at G,>G>followed by the liberal economic olicy initiatives undertaken by the then finance minister and current -rimeMinister >>8 .ebruary G=, ?==G 8 6n .ebruary G=, ?==G, the Sensex surged ast the D>>> mark in the wake of themarket8friendly *udget announced by >>8 March D>, ?==G 8 6n March D>, ?==G, the Sensex crossed the H,>>>8mark and closed at H,>=? on theexectations of a liberal exort8imort olicy! It was then that the /arshad Mehta scam hit the markets andSensex witnessed unabated selling!

F>>>8 6ctober ??, ?=== 8 6n 6ctober C, ?===, the Sensex crossed the F,>>>8mark as the *haratiya 2anata-arty8led coalition won the ma"ority in the ?Dth ok Sabha election!

B>>>, .ebruary ??, G>>> 8 6n .ebruary ??, G>>>, the information technology boom heled the Sensex tocross the B,>>>8mark and hit and all time high of B,>>B!

>>>, 2une G?, G>>F 8 6n 2une G>, G>>F, the news of the settlement between the Ambani brothers boostedinvestor sentiments and the scri+s of 9I, 9eliance Energy, 9eliance )aital and I-) made huge gains!1his heled the Sensex crossed ,>>> oints for the first time!

C>>>8 Setember C, G>>F 8 6n Setember C, G>>F, the *ombay Stock Exchange;s benchmark D>8share index the Sensex 8 crossed the C>>> level following brisk buying by foreign and domestic funds in early trading!

=>>>8 >F 8 1he Sensex on $ovember GC, G>>F crossed =>>> to touch =>>>!DG oints during

mid8session at the *ombay Stock Exchange on the back of frantic buying sree by foreign institutionalinvestors and well suorted by local oerators as well as retail investors!

?>,>>>8 .ebruary , G>>B 8 1he Sensex on .ebruary B, G>>B touched ?>,>>D oints during mid8session! 1heSensex finally closed above the ?>,>>>8 mark on .ebruary , G>>B!

??,>>>8 March G, G>>B 8 1he Sensex on March G?, G>>B crossed ??,>>> and touched a eak of ??,>>?oints during mid8session at the *ombay Stock Exchange for the first time! /owever, it was on March G,G>>B that the Sensex first closed at over ??,>>> oints!

?G,>>>8 Aril G>, G>>B 8 1he Sensex on Aril G>, G>>B crossed ?G,>>> and touched a eak of ?G,>>H ointsduring mid8session at the *ombay Stock Exchange for the first time!

?D,>>>8 6ctober D>, G>>B 8 1he Sensex on 6ctober D>, G>>B crossed ?D,>>> for the first time! It touched a

eak of ?D,>D=!DB and finally closed at ?D,>GH!GB! ?H>>>8 >B 8 1he Sensex on >B crossed ?H,>>>! ?F,>>>8 2uly B, G>> 8 1he Sensex on 2uly B, G>> crossed ?F,>>> marks! ?B,>>>8 Setember ?=, G>> 8 1he Sensex on Setember ?=, G>> crossed the ?B,>>> mark! ?,>>>8 Setember GB, G>> 8 1he Sensex on Setember GB, G>> crossed the ?,>>> mark for the first time! ?C,>>>8 6ctober =, G>> 8 1he Sensex on 6ctober =, G>> crossed the ?C,>>> mark for the first time! ?=,>>>8 6ctober ?F, G>> 8 1he Sensex on 6ctober ?F, G>> crossed the ?=,>>> mark for the first time! G>,>>>8 6ctober G=, G>> 8 1he Sensex on 6ctober G=, G>> crossed the G>,>>> mark for the first time! G?,>>>8 2an >C, G>>C 8 1he Sensex on 2anuary C, G>>C touched all time eak of G?>C before closing at

G>CD!

@e have seen Sensex Milestones in above case, which is also known as #er )ircuit of Stock Market! et+sstudy what is 6pper ,ircuit in Stock ExchangeL

#er circuit is a system to curb excessive seculation in the stock market, alied by the stock exchange

authorities, when the index surts or lunges by more than a fixed limit! 1rading is then susended for sometime to let the market cool down!

1he market wide circuit breakers would be triggered by movement of either Sensex or the $SE SK- )$($ifty whichever is breached earlier!



22/35

In case of a ?>L movement of either of these indices, there would be a ?8hour market halt if the movementtakes lace before ? !m! In case the movement takes lace at or after ? !m! but before G!D> !m! there will

be a trading halt for ?U hour! In case the movement takes lace at or after G!D> !m! there will be no tradinghalt at the ?>L level and the market will continue trading!

In case of a ?FL movement of either index, there will be a G8hour market halt if the movement takes lacebefore ? !m! If the ?FL trigger is reached on or after ? !m! but before G !m!, there will be a ? hour halt! Ifthe ?FL trigger is reached on or after G !m! the trading will halt for the remainder of the day!

In case of a G>L movement of the index, the trading will be halted for the remainder of the day!

Sensex falls

Some ma"or single8day falls of the Sensex have occurred on the following datesN

2anuary G?, G>>C 888 ?,H>C!DF oints! 6ct GH, G>>C888?>>!BD oints March ?, G>>C 888 =F?!>D oints 2uly B, G>>= 888 C> oints 2anuary GG, G>>C 888 CF oints .ebruary ??, G>>C 888 CDD!=C oints May ?C, G>>B 888 CGB oints 6ctober ?>, G>>C 888 C>>!?> oints March ?D, G>>C 888 >!BD oints > 888 B=!HC oints 2anuary , G>>= 888 H=!>F oints

March D?, G>> 888 GB!CF oints 6ctober B, G>>C 888 GH!BG oints 6ctober ?, G>> 888 ?!HD oints Setember ?F, G>>C 888 ?>!>> oints 2anuary ?C, G>> 888 BC!CG oints $ovember G?, G>> 888 BC!?C oints August ?B, G>> 888 BHG!> oints August ?, G>>= 888 BGB!? oints 2une G, G>>C 888 B>>!>> oints!

et+s also study what is lower circuitV

1he market8wide circuit breakers are triggered by movement of either the *SE Sensex or the $SE SK-)$( $ifty, whichever is breached earlier!

In case of a ?>L movement of either of these indices, there would be a one8hour market halt if themovement takes lace before ?5>> !m! In case the movement takes lace at or after ?5>> !m! but beforeG5D> !m! there would be trading halt for WU hour! In case movement takes lace at or after G5D> !m! therewill be no trading halt at the ?>L level and market shall continue trading!



23/35

In case of a ?FL movement of either index, there shall be a two8hour halt if the movement takes lace before? !m! If the ?FL trigger is reached on or after ?5>>!m! but before G5>> !m!, there shall be a one8hour halt!If the ?FL trigger is reached on or after G5>> !m! the trading shall halt for remainder of the day!

In case of a G>L movement of the index, trading shall be halted for the remainder of the day!

1hese ercentages are translated into absolute oints of index variations on a 4uarterly basis! At the end ofeach 4uarter, these absolute oints of index variations are revised for the alicability for the next 4uarter!1he absolute oints are calculated based on closing level of index on the last day of the trading in a 4uarterand rounded off to the nearest ?> oints in case of SK- )$( $ifty!Although introduced in $ovember ?==G, it was used for the first time in the *ombay Stock Exchange on1uesday, = March ?==D when the Sensex declined by more than FL from the oening level, i!e! fromGHF?!G> to GD?C!GB! At that time, the circuit was FL!

1he both the ratio of uer circuit K lower )ircuit are the same!

+,-ERSE#I MSurve( of Indian InvestorsM

An $)AE988SE*I Survey of Indian Investors of 2une G>>> reorted that only !H er cent ofIndian households invested in e4uity or debenture securities, either directly or through mutual funds!



24/35

1he comarable number for the #0 was GD er cent, )anada HB er cent, :ermany ?C er cent,.rance HC er cent, South 0orea C er cent, Australia F> er cent, and the #S about HC er cent!1he survey also revealed that excluding investments erceived as risk8free &e!g! $S), I) olicies' Indianhouseholds rank the following four categories in a descending order of risk reference5

&?' *ank deosits,

&G' :old,

&D' #1I and other mutual funds,

&H' Stocks, comany deosits, debentures, and chit funds!

Indian brokerages, cororate, market analysts and others have been known to use the media to sreadmisinformation! In most cases, even if wrongdoing is established, it is almost imossible to make good thelosses incurred by investors! As such, given the information asymmetries and recurring eisodes of marketmaniulation, it is understandable that retail investors refer to invest in ublic sector debt instruments! 1hislack of investor confidence results in significant oortunity costs! .or examle, stock market investmentalternatives can romote savings incentives! In efficient markets, investors are able to readily convert their

e4uity holdings into cash without affecting stock rices! 1his ease of exit attracts investors &both domesticand foreign' and enhances caital allocation efficiency &reducing the deendence on ure bank financing'and growth! .urther, well8functioning e4uity markets can lead to a better monitoring of management

erformance and thereby imrove cororate governance! @hat else can SE*I do to increase e4uity marketdeth and boost investor confidenceV In most caital market regulators around the world, including the SE)in the #S, more than half the staff is engaged in surveillance and legal functions! )omaratively, SE*I isinade4uately staffed both in the number and strength of its surveillance and legal ersonnel! 1o use a militaryterm, SE*I does not have an ade4uate ;teeth to tail; ratio!

1he 2-) and SE*I reorts on stock market, mutual fund and other scams of the last ten yearsclearly indicate the comlexity of linkages across brokerages, banks, finance comanies, and domestic,overseas cororate bodies!

)onse4uently, surveillance staff needs to have an ade4uate market background and strongmotivation! .urther, SE*I;s technical caabilities lag those of entities it is meant to regulate, e!g! stockexchanges and brokerages! SE*I also needs to anticiate market anomalies, romote innovation, andrelentlessly ursue ugrading technology!

It is difficult for SE*I to attract the talent and doggedness re4uired for its surveillance and marketdeveloment resonsibilities! 1oday, it is unlikely that graduates from rominent law or business schoolswould consider starting their careers in SE*I! /owever, motivated and talented rofessionals would "oin if

they sense that they would ac4uire marketable skills by working in SE*I! 2unior ositions could be filledthrough a cometitive entrance examination to build a rofessional cadre much in the same way as the 9*I!*y definition, the art8time SE*I board members from the ministry of finance, >G amendment of the SE*I Act increased the number of full8time boardmembers, the regulator;s investigative owers, and the enalties that can be imosed! SE*I badly needs itscomlement of three full8time board members who are knowledgeable about caital markets, as rescribedin the amended Act!

It bears mentioning though that even in develoed markets only a small fraction of infringements aresuccessfully rosecuted! In out8of8court settlements, fines are usually aid without admission of guilt!



25/35

/ence, even with better surveillance and effective legal follow8u it would be unrealistic to exect animmediately higher success rate in the rosecution of comarable infringements in India! !B er cent of :!F er cent of :,>>> crores er annum!

Stock markets are oised to benefit from two factors5

&A' A relatively young oulation!

&*' -ension reforms!

Most studies indicate that returns on long8term investments in a well8diversified stock ortfolio usuallyexceed those on fixed8income securities!

1herefore, long8term investments in e4uity should be attractive for the increasing number of youngretail investors in middle8income grous! SE*I needs to ensure that the risk8return trade8offs of longer8terme4uity investments are well understood by younger investors! Similarly, as funded ension schemes become

more accessible, this could boost investor interest in e4uity! 1o summarise, Indian e4uity markets have aconsiderable amount of catching u to do with the deeer and more li4uid markets! 6ur efforts need to befocused on5

&a' @idening the base of the stock market, increasing li4uidity and reducing transaction costs for anincreasing number of stocks!

&b' Exanding the universe of traded instruments and ugrading technology!

&c' 9aising retail investor )onfidence by increasing the effectiveness of surveillance and increasing investorsohistication!

&d' -romoting greater self8regulation, transarency, disclosure and cometition amongst broker8dealers andstock exchanges!

NCAER SURVEY ESTIMATES

Estimates of investor households and individual investors &direct ownershi'5 An estimated ?G!C

million, or nearly C ercent, of all Indian households reresenting ?= million individuals had directlyinvested in e4uity shares or debentures or both as at the end of the financial year ?==C8==!

Estimates of unit owning households and individual unit holders of mutual funds &indirectownershi'5 An estimated ?F million or nearly = er cent of all households have invested in units of



26/35

mutual funds, many of which could be investor households! 1here is likely to be at least GD millionunit holders in mutual funds

More households own mutual funds than e4uity shares and debentures5

1he number of households owning units of mutual funds is more than the investor households whichhave investments in shares and debentures! 1he existence of such large number of unit holders is a

measure of the growth of mutual funds! 1he number of e4uity investor households and e4uity investors far exceed debenture owning

households and debenture holders5 6f the ?G!C million investor households, ?G!? million, or ercent of all households reresenting aroximately ?C million individual investors, owned e4uityshares and only D! million households, or ? ercent, reresenting about F million investors owneddebentures! 1he bulk of the debenture owning households are also e4uity investor households!

/ouseholds hardly differ in their risk ercetion of e4uity shares and debentures5 It is imortant forcororate to note that households have hardly differed in the risk ercetion of e4uity shares anddebenturesN this runs contrary to theory and exectations!

6wnershi of e4uity shares and debentures by households and individuals on the rise5 )omarisonof estimates of investor households available from the Survey of /ousehold .inancial Assets &S6.A'conducted by $)AE9 at an all India level in ercent comared to ?=

ercent for urban investor households!

:rowth of investor households have been faster between ?==?8=G and ?==C8== than between ?=CF8CBand ?==?8=G5 )omarison of the estimates of investor households available from the S6.A in ?=CB,with those available from a survey conducted by SE*I in ?==?8=G and the resent Survey shows asharer rise in investor households between the eriod ?==?8=G and ?==C8== than between ?=CF8CB

and ?==?8=G! More number of investor households became e4uity share owners after ?==? than rior to ?==?5

About DB ercent of the investor households became investors in e4uity shares rior to ?==?, whilethe ma"ority of the investor households entered the market after ?==?! 1he growth of the investorhouseholds in the ?==>+s is commensurate with the growth of the securities market in the decade!

1he growth attern of the investor households reflects the attern of exansion of the market and isconsistent with the findings of the earlier Surveys5 1he rimary market exanded raidly between?==?8 ?==F and contracted thereafter! 1his exlains why about H ercent of the investor householdsentered the market between ?==?8=G and ?==F8=B and a fat roortion number ? ercent enteredthe market thereafter!

*ut desite this growth only a fringe of Indian households have direct investments in e4uity shares,or debentures or both5 More than ?FB million, or =G ercent, of all Indian households were non8investor households who did not have any investment in these instruments!

Some of the develoed markets have a larger oulation of investors5 In the #S for examle,according to survey conducted by the Investment )omany Institute in ?===, HC!G ercent of thehouseholds own e4uities, directly or indirectly through mutual funds, of which FD ercent, i!e! GF

ercent of all #S households directly own e4uity! 1here is therefore a long way to go for the Indian



27/35

markets! Ma"ority of the investor households in the #S owns e4uities indirectly through mutualfunds as is the case with the Indian market!

1he ercentage of households owning e4uity shares or debentures or both is substantially higher inurban areas than in rural areas5 6f the HC million urban households, an estimated C!C millionhouseholds, or ?C er cent, reresenting aroximately ?D million urban investors owned e4uityshares or debentures or both! 6f the ?G? million rural households, only about H million households,

or D er cent, reresenting nearly B million rural investors owned these instruments!

9eforms, regulatory framework rovided by SE*I and macroeconomic changes were resonsible forthe growth of the market! .ollowing the reforms which began in 2une ?==?, liberalization inindustry, trade, taxation and financial sector had given the imetus to the growth of caital market!1he liberalization in rivate investments, the structural change in the market accomanied by theregulatory environment rovided by SE*I for investor rotection and develoment of the marketenabled increasingly large number of comanies to access the caital market! 1he growinginvestment exectations of the households arising from the above factors, the high growth of theeconomy accomanied by increase in savings rate and greater investor confidence rovided by theregulatory environment attracted large number of investors into the market!

$on8investor households are inhibited by several factors5 ow er caita income, arehension ofloss of caital and return on caital, and economic insecurity which are all inter8related factors,significantly influence the investment attitude of the households! 1he lack of awareness about thesecurities market and the absence of a deendable infrastructure and distribution network whichcould have facilitated the households+ access to the market, couled with their aversion to risk,aear to have often inhibited the non8investor households from investing in the securities market!1hey have instead referred to rely on traditional institutions such as banks and ost offices withwhich they have had long term relationshi! 1he automation of the stock exchanges began from?==F and the trading terminals sread in a big way since ?==! 1he findings of the Survey show thatthe benefits of these measures were yet to be fully realized!

The 5emographics


28/35

Self8emloyed and salaried class constitute significant ma"ority of the investorhouseholds!

1he Indian e4uity investors tend to be middle aged! Ma"ority of all households including non8investor households fall in the low income

grou! 6wnershi of consumer durables by the investor and non8investor households shows

difference in their attitudes towards sending and investment!

The Risk :erception

Investor households diversify their investment ortfolio to balance risks! It isthe need of the investors to balance the risks in investment, with return and li4uidity that lead them todiversify their investment ortfolio deending on the level of income of the households!

.or households, safety and li4uidity i!e! reliability, are the rimaryconsiderations which determine the choice of an asset5 :raded on a four oint scale of risk ercetionnamely5 very safe, reasonably safe, somewhat safe and risky, the eight financial instruments surveyedexcluding the instruments erceived as risk free, such as contractual savings, $S), I) -olicy etc! could beclassified into four broad categories ercetion bank fixed deosits, gold, #1I and other mutual funds andthe remaining instruments viz, comany deosits, e4uity shares, debentures, chit funds!

.rom the oint of view of safetyN bank fixed deosit stands aart from the rest

of the instruments5 About BF ercent of all households and B ercent of the investor households havegraded bank fixed deosits as being very safe and only about ?H ercent of all households and H ercent ofthe investor households did not have any oinion about the risk of bank fixed deosits! Interestingly, onlyD> ercent ofall households and D ercent of the investor households have regarded gold as very safe and D? ercent ofall households and ?F ercent of the investor households had no oinion about the risk in investment in gold!

Investor households are aware of risks in investing in e4uity shares!

Attractiveness of $*.)s on the decline5 Among other forms of fixed deosits,fixed deosits of $*.)s have been considered risky by HC ercent of all households and DD ercent of theinvestor households! *y early ?===, when the survey was being conducted, the roblems faced by the

$*.)s had become well known and this would erhas account for the high ercentage of the householdsconsidering $*.) as being risky!

/ierarchy of risks in certain instruments5 9anked by a ascending order of riskercetion, bank fixed deosit were considered very safe i!e! least risky, followed by gold, #nits of #1I8



29/35

#SBH, #1I8other schemes, .ixed deosits of $on8:overnment comanies, Mutual .unds8e4uity shares anddebentures!


30/35

Investment attern match the risk ercetions of households5 1he urban investor households have ahigher roortion of the investments in e4uity shares, debentures and mutual funds comared to the ruralhouseholds!

1here is a correlation between the income levels and investments of the households in securitiesmarket related instruments5 1hus not more than F ercent of the investments of the households in the lowand middle income grous are in e4uity shares, debentures and mutual funds comared to around ?G ercent

for the high income grous!


31/35

*ank fixed deosits continue to aeal the most5 1he share of households investing in a secificinstrument is an index of their reference for that instrument, then fixed deosits with banks, aears to bethe most referred form of investment! *ut how long this aeal will endure in the face of declining interestrates remains to be seen! .ixed deosits with $*.)s have been accorded low riority with only D ercent ofthe households intending to invest in these fixed deosits!

Increased ma"ority of existing investor households are unlikely to invest in the securities market5 It

is significant that the ma"ority of urban investor households &FB ercent' and rural investor households &Gercent' are unlikely to make fresh investments in e4uity shares! 1his is indeed a matter of concern as itwould amount to an exression of a lack of confidence by the existing investors on the e4uity market!

1here is an exected diversification of investment with rise in income levels! )lassification of allhouseholds lanning to invest in the next one year by monthly income levels clearly evidences the execteddiversification of investment with level of income! .or examle, with increasing income levels, higher

roortion of households in at that income level invests in #1I! 1his is true even for e4uity investments!Investment in mutual funds and e4uity become oular at higher income levels, indicating an increase in therisk taking abilities at higher income levels!

E9uit( Investor BouseholdsG :rofile

E4uity investor households have invested through rimary and secondary markets but there are morehouseholds investing through the rimary market5 6ut of the ?G!? million e4uity investor households, CH

ercent have invested in e4uity shares through the rimary market and BD ercent have bought e4uity sharesin the secondary market!

1he aeal of the secondary market investments seem to be less than the rimary market ercent of the e4uity investorhouseholds were the Qfirst generation investorsR!

E4uity investor households with higher income have reorted better erformance of e4uityinvestment, robably due to their access to rofessional advice! -ossibly ade4uate ortfolio diversificationat higher income levels would also have heled in imroving ortfolio erformance! ower income grouscannot afford ortfolio diversification and are therefore exosed to unsystematic risk!



32/35

3III4$!ective of the Stud(

*Title of the proect

1he ro"ect is titled as S1#


33/35

+s have heled to bring the Indian securities marketinto the main stream of the Indian financial system! As a result, the growth in investment by individualinvestors has become 4uite significant! 1his made it ertinent to have a first hand in deth view of the extentof ublic articiation directly in the securities market or through mutual funds!

1he Evolution of Stock Exchanges in India 6rigin of *ombay Stock Exchange in ?CF and GDother Stock Exchanges throughout India! 1he securities traded were e4uity, debt, derivatives such asotions, futures, and index!

1he securities market has essentially three categories of articiants, viz!, the issuer of securities, theinvestors in the securities and the intermediaries! 1he securities have two interdeendent and insearablesegments, the new issues &rimary' and the stock &secondary' market! 1he rimary market rovides the



34/35

channel for creation and sale of new securities, while the secondary market deals in securities reviouslyissued! 1he secondary market oerated through two mediums, namely, the over8the8counter &61)' marketand the exchange8traded market! All the trades taking lace over a trading cycle &day1' are settled togetherafter a certain time &1TG day'! 1he trades executed on the $ational Stock Exchange &$SE' are cleared andsettled by a clearing cororation! 1he clearing cororation acts as a counter arty and guarantees settlement!

Exchanges in the country, which offer screen based trading system! 1he trading system is connected

using the OSA1 technology from over GC? cities! 1here are =,DDF trading members registered with SE*I asat end March G>>B! In order to rovide efficiency, li4uidity and transarency, $SE introduced a nation8wideon8line fully automated screen based trading system &S*1S'!

-resently only two exchanges viz!, $SE and Stock Exchange, Mumbai &*SE' rovides trading in thederivatives of securities!

!=HL in total world turnover in G>>F!

Market caitalization as ercent for :>H! 1here are twodeositories in India, viz! $S>B from ?H! billion at the end of March, G>>F!

According to the 9*I data, household sector accounted for CF!HL of gross domestic savings duringG>>H8>F! /owever, this has decreased to CD!=L in G>>F8>B! In the last fiscal G>>F8>B, they have investedH!HL of financial savings in deosits, GH!GL in insurance7rovident funds, ?G!DL on small savings, and!GL in securities! 1hus the fixed income bearing instruments are the most referred assets of the householdsector!

It aears that more and more eole refer mutual funds &M.s' as their investment vehicle! 1hischange in investor behaviour is induced by the evolution of a regulatory framework for M.s, taxconcessions offered by government and reference of investors for assive investing! Starting withan asset base of 9s!GF> million in ?=BH, the total assets under management at the end of March G>>Bhas risen to 9s!G, D?C,BG> million! million in ?==D8=H to 9s!FG, C>> million in G>>F8>B!

1he total exchange traded derivatives witnessed a value of 9s!HC, GHG,F=G million during G>>F8>B asagainst 9s!GF, BH?,GB= million during the receding year! $SE roved itself as the market leadercontributing ==!=L of the total turnover in G>>F8>B in India!

In the interest of investors, SE*I issued the


35/35

select entities to rovide custody &)onstituent S:' accounts! 6ther measures include abolition of 1

Documents

Project-study of Stock Exchanges