Shares Stocks NSE BSE

STOCK MARKET TRENDS IN INDIA
CHAPTER I SECURITIES MARKET IN INDIA AN OUTLINE

A. INTRODUCTION
fter the securities are issued in the primary market, they are traded in the
secondary market by the investors. The stock exchanges along with a host of
other intermediaries provide the necessary platform for trading in secondary
market and also for clearing and settlement. The securities are traded, cleared and settled
within the regulatory framework prescribed by the Exchanges and the SEBI. Till
recently, it was mandatory for the companies to list their securities on the regional stock
exchange nearest to their registered office, in order to provide an opportunity to
investors to investtrade in the securities of local companies. !owever, following the
withdrawal of this restriction, the companies have an option to choose from any one of
the existing stock exchanges in India to list their securities. "ue to the earlier regulation
re#uiring companies to get listed first at the regional stock exchange, there are in all $%
exchanges operating today in the country.
&
'ith the increased application of information technology, the trading platforms of all the
stock exchanges are accessible from anywhere in the country through their trading
terminals. !owever, the trading platform of (SE is also accessible through internet and
mobile devices. In a geographically widespread country like India, this has significantly
expanded the reach of the exchanges to the homes of ordinary investors and assuaged the
aspirations of people to have exchanges in their vicinity.
&s a result of the reformsinitiatives taken by the )overnment and the *egulators, the
market microstructure has been refined and moderni+ed. The investment choices for the
investors have also broadened. The securities market moved from T,% settlement
periods to T,$ rolling settlement with effect from &pril -, $..%. /urther, straight
through processing has been made mandatory for all institutional trades executed on the
stock exchange. *eal time gross settlement has also been introduced by *BI to settle
inter0bank transactions online at real time mode. These developments in the securities
1
market provide the necessary impetus for growth and development, and thereby
strengthen the emerging market economy in India.
B. PRODUCTS AND PARTICIPANTS
obili+ation of savings from surplus savers to deficit savers is most
efficiently carried out by the securities market through a range of complex
products called 1securities2. The definition of securities as per the S3*&,
-456 includes shares, bonds, scrips, stocks or other marketable securities of like nature
in or of any incorporate company or body corporate, government securities, derivatives
of securities, units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the central government. The
securities market has essentially three categories of participants, viz., the issuer of
securities, investors in securities and the intermediaries. The issuers are the borrowers or
deficit savers, who issue securities to raise funds. The investors, who are surplus savers,
deploy their savings by subscribing to these securities. The intermediaries are the agents
who match the needs of users and suppliers of funds for a commission. These
intermediaries pack and unpack securities to help both the issuers and investors to
achieve their respective goals. There are a large variety and number of intermediaries
providing various services in the Indian securities market 7Table -0-8. This process of
mobili+ation of resources is carried out under the supervision and overview of the
regulators. The regulators develop fair market practices and regulate the conduct of
issuers of securities and the intermediaries. They are also in charge of protecting the
interests of the investors. The regulator ensures a high service standard from the
intermediaries and supply of #uality securities and non0manipulated demand for them in
the market.
9
2
C. MARKET SEGMENTS
he securities market has two interdependent segments: the primary and the
secondary market. The primary market is the channel for creation of new
securities. These securities are issued by public limited companies or by
government agencies. In the primary market the resources are mobili+ed either through
the public issue or through private placement route. It is a public issue if anybody and
everybody can subscribe for it, whereas if the issue is made available to a selected group
of persons it is termed as private placement. There are two ma;or types of issuers of
securities, the corporate entities who issue mainly debt and e#uity instruments and the
government 7central as well as state8 who issue debt securities. These new securities
issued in the primary market are traded in the secondary market. The secondary market
enables participants who hold securities to ad;ust their holdings in response to changes in
their assessment of risks and returns. The secondary market operates through two
T
3
mediums, namely, the over0the0counter 7<T38 market and the exchange0traded market.
<T3 markets are informal markets where trades are negotiated. 9ost of the trades in the
government securities are in the <T3 market. &ll the spot trades where securities are
traded for immediate delivery and payment take place in the <T3 market. The other
option is to trade using the infrastructure provided by the stock exchanges. There are $%
exchanges in India and all of them follow a systematic settlement period. &ll the trades
taking place over a trading cycle 7day=T8 are settled together after a certain time 7T,$
day8.
The trades executed on the (ational Stock Exchange 7(SE8 are cleared and settled by a
clearing corporation. The clearing corporation acts as a counterparty and guarantees
settlement. (early -..> of the trades in capital market segment are settled through
demat delivery. (SE also provides a formal trading platform for trading of a wide range
of debt securities, including government securities. & variant of the secondary market is
the forward market, where securities are traded for future delivery and payment. &
variant of the forward market is /utures and <ptions market. ?resently only two
exchanges viz., (SE and Stock Exchange, 9umbai 7BSE8 provides trading in the
derivatives of securities.
D. SECONDARY MARKET
orporate Securte! " There are $% exchanges in the country, which offer
screen based trading system. The trading system is connected using the
@S&T technology from over %5A cities. There were 4,%6B trading members
registered with SEBI as at end 9arch $..C 7Table -0-.8.
C
The market capitali+ation has grown over the period indicating more companies using
the trading platform of the stock exchange. The all India market capitali+ation is
estimated at *s. -%,-BA,45% million at the end of 9arch $..C. The market capitali+ation
4
ratio defined as the value of listed stocks divided by )"? is used as a measure of stock
market si+e. It is of economic significance since market is positively correlated with the
ability to mobili+e capital and diversify risk. It increased sharply to 5$.%> in $..%0.C
against $B.5> in the previous year. The trading volumes on exchanges have been
witnessing phenomenal growth over the past decade. The trading volume, which peaked
at *s. $B,B.4,4.. million in $...0.-, fell substantially to *s. 4,6B4,.4% million in $..$0
.%. !owever, the year $..%0.C saw a turnaround in the total trading volumes on the
exchanges. It registered a volume of *s. -6,$.C,4AA million. The turnover ratio, which
reflects the volume of trading in relation to the si+e of the market, has been increasing by
leaps and bounds after the advent of screen based trading system by the (SE. The
turnover ratio for the year $..%0.C accounted at -$$.4>. The relative importance of
various stock exchanges in the market has undergone dramatic change during this
decade. The increase in turnover took place mostly at the big exchanges. The (SE yet
again registered as the market leader with more B5> of total turnover 7volumes on all
segments8 in $..%0.C. Top 5 stock exchanges accounted for 44.BB> of turnover, while
the rest -B exchange for less than ..-$> during $..%0.C 7Table -0--8. &bout ten
exchanges reported nil trading volume during the year.
The movement of the SD? 3(E (ifty, the most widely used indicator of the market, is
presented in 3hart -0-. The index movement has been responding to changes in the
5
governmentFs economic policies, the increase in /IIs inflows, etc. !owever, the year
$..%0.C witnessed a favorable movement in the (ifty, wherein it registered its all time
high in Ganuary $..C of $.-C.65. The point0to0point return of (ifty was B..-C> for
$..%0.C.
o#er$%e$t Securte! 0 The trading in government securities exceeded the
combined trading in e#uity segments of all the exchanges in the country
during $..%0.C. The aggregate trading in central and state government
dated securities, including treasury bills, increased by manifold over a period of time.
"uring $..%0.C it reached a level of *s. $6,A4$,.4. million. The share of '"9
segment of (SE in total turnover for government securities decreased marginally from
5$> in $..$0.% to CA.6> in $..%0.C. !owever, the share of '"9 segment of (SE in
the total of (on0repo government securities increased marginally from AC..-> in $..$0
.% to AC.B4> in $..%0.C 7Table -0-.8.
G
END O& CHAPTER I
6
CHAPTER II 0 REGULATORY &RAME'ORK
The four main legislations governing the securities market are
7a8 T(e SEBI Act) *++, 7b8 T(e Co%pa$e! Act) *+-. 7c8 T(e Securte! Co$tract!
/Re0u1ato$2 Act) *+-., and 7d8 T(e Depo!tore! Act) *++.
& brief about these legislations are as given below:
EBI Act) *++,3 The SEBI &ct, -44$ was enacted to empower SEBI with
statutory powers for /a2 protecting the interests of investors in securities, /42
promoting the development of the securities market, and /c2 regulating the
securities market. Its regulatory ;urisdiction extends over corporates in the issuing
capital and all intermediaries and persons associated with securities market. It can
conduct en#uiries, audits and inspection of all concerned participants and ad;udicate
offences under this &ct. It has powers to register and regulate all the market
intermediaries. /urther it can also penali+e them in case of violations of the provisions of
the &ct, *ules and *egulations made there under. SEBI has full autonomy and authority
to regulate and develop an orderly securities market.
S
7
ecurte! Co$tract! /Re0u1ato$2 Act) *+-.3 It provides for direct and indirect
control of virtually all aspects of the securities trading including the running of
stock exchanges with an aim to prevent undesirable transactions in securities. It
gives the 3entral )overnment regulatory ;urisdiction over /a2 stock exchanges through a
process of recognition and continued supervision, /42 contracts in securities, and /c2
listing of securities on stock exchanges. &s a condition of recognition, a stock exchange
complies with the re#uirements prescribed by the 3entral )overnment. The stock
exchanges frame their own listing regulations in consonance with the minimum listing
criteria set out in the *ules.
S
epo!tore! Act) *++.3 The "epositories &ct, -446 provides for the
establishment of depositories for securities to ensure transferability of
securities with speed, accuracy and security. /or this, these provisions have
been made: /a2 making securities of public limited companies freely transferable sub;ect
to certain exceptionsH /42 demateriali+ing the securities in the depository modeH and /c2
providing for maintenance of ownership records in a book entry form. In order to
streamline the settlement process, the &ct envisages transfer of ownership of securities
electronically by book entry without moving the securities from persons to persons. The
&ct has made the securities of all public limited companies freely transferable,
restricting the companyFs right to use discretion in effecting the transfer of securities,
and the transfer deed and other procedural re#uirements under the 3ompanies &ct have
been dispensed with.
D
o%pa$e! Act) *+-.3 It deals with issue, allotment and transfer of securities
and various aspects relating to company management. It provides for
standards of disclosure in the public issues, particularly in the fields of
company management and pro;ects, information about other listed companies under the
same management, and management perception of risk factors. It also regulates
underwriting, the use of premium and discounts on issues, rights and bonus issues,
payment of interest and dividends, supply of annual report and other information.
C
8
A. RULES) REGULATIONS 5 REGULATORS
he )overnment has framed rules under the S3*&, the SEBI &ct and the
"epositories &ct. The SEBI has framed regulations under these acts for
registration and regulation of the market intermediaries and for prevention of
unfair trade practices. Inder these &cts, the )overnment and the SEBI issue
notifications, guidelines and circulars, which the market participants comply with. The
S*<s like the stock exchanges have also laid down their rules and regulations. The
regulator has to ensure that the market participants behave in a desired manner so that
securities market continue to be a ma;or source of finance for corporate and government
while protecting the interest of investors. The responsibility for regulating the securities
market is shared ;ointly by "epartment of Economic &ffairs 7"E&8, "epartment of
3ompany &ffairs 7"3&8, *eserve Bank of India 7*BI8 and SEBI. The activities of all
these agencies are coordinated by a !igh Jevel 3ommittee on 3apital 9arkets. 9ost of
the powers under the S3*& are exercisable by "E& while a few others by SEBI and
some are concurrently by them. The regulation of the contracts for sale and purchase of
securities, gold related securities, money market securities and securities derived from
these securities and ready forward contracts in debt securities are exercised concurrently
with the *BI. The SEBI &ct and the "epositories &ct are mostly administered by SEBI.
'hile the rules under the securities laws are framed by government, regulations are
framed by SEBI. The powers under the 3ompanies &ct relating to issue and transfer of
securities and non0payment of dividend are administered by SEBI in case of listed public
companies and public companies proposing to get their securities listed. The S*<s
ensure compliance of market participants with their own rules as well as with the rules
relevant for them under the securities laws.
T
END O& CHAPTER II
CHAPTER III 0 RE&ORMS IN INDIAN SECURITIES MARKETS
A. Po1c6 De#e1op%e$t!
9
ver the last decade the )overnment and the market regulators have taken
several policy measures to improve the operations of the stock exchanges
and market intermediaries. The measures are aimed at improving the market
infrastructure and upgradation of risk containment, so as to protect the interest of the
investors. The policy developments during &pril $..% and Gune $..C pertaining to
trading of securities are enumerated below:
<
I$tat#e! 7ro% Go#er$%e$t
I. U$o$ Bu80et
The Inion Budget for $..C0.5 proposed the following measures that have a bearing on
the functioning of the secondary market:
-. &n alternate trading platform for Small and 9edium Enterprises 7S9E8 have been
proposed to be set up. This will help these enterprises in raising e#uity and debt from the
3apital 9arket.
$. The procedure for registration and operation of /IIs is to be made simpler and #uicker.
%. The investment ceiling for /IIs in debt funds have been raised to ISK -.A5 billion
from ISK - billion.
C. Jong0term capital gains tax on securities transaction has been abolished. The short
term capital gains tax has been proposed to be at a flat rate of -. percent.
5. Turnover taxes have also been imposed on delivery0based transaction at the rate of
..-5> and for non0delivery transactions at the rate of ...-5> for e#uities and ...-> on
trades on the derivatives segment.
II. Pe$!o$ S6!te%9I$ter% Pe$!o$ &u$8 Re0u1ator
The )overnment has approved the basic features of the new pension system. & pension
fund regulatory and development authority 7?/*"&8 in the interim is to be set up with
the purpose to regulate and develop the pension market. In this system, there would be
three different choices for investments e.g. <ption &, B and 3. The option & would
imply predominant investments in fixed income instruments with some investments in
10
e#uity. <ption B with greater investments in e#uity and <ption 3 would carry e#ual
investment in fixed income and e#uity. The pension fund managers would be free to
make investments in international markets sub;ect to regulatory restrictions.
III. A%e$8%e$t to Securte! Co$tract! /Re0u1ato$2 Act) *+-:
&s per the recommendations of a 3ommittee constituted by the SEBI under the
chairmanship of Shri L. *. *amamoorthy, the Securities 3ontracts 7*egulation8 *ules,
-45A have been amended. They are called the Securities 3ontracts 7*egulation8
&mendment *ules, $..%. It states that a member is permitted to conduct business in
commodity derivatives only by setting up a separate company. It is re#uired that the
company should comply with the regulatory re#uirements in terms of net worth, capital
ade#uacy, margins and exposure norms as maybe specified by the /orward 9arket
3ommission.
I;. Re#!e8 ECB Gu8e1$e!
The )overnment notified the liberal External 3ommercial Borrowing 7E3B8 policy on
Ganuary -4, $..C. Jisted below are the new policies:
7i8 Re%o#a1 o7 e$8"u!e re!trcto$!: E3Bs are allowed for corporate investments in
industrial sector especially infrastructure sector for ac#uisition of shares under the
)overnments disinvestment programme of ?SI shares up to ISK 5.. million having
minimum average maturity of 5 years under the automatic route. The usual restriction on
E3B for investment in capital market or in the real estate is to continue.
7ii8 E1041t6: &ll corporates, except banks, (B/3s and /Is are eligible to borrow
through the E3B route. !owever, those banks and /Is, who have participated in the
Textile or Steel sector restructuring package of the )overnment*BI, are permitted, but
only to the extent of their investment in the package.
7iii8 I$tere!t Rate Sprea8!: &ll E3Bs are sub;ect to the following revised maximum
spreads, over six month JIB<* or the applicable benchmark7s8, as the case may be 7a8
&verage maturity of %05 years 0$.. basis points and 7b8 9ore than 5 years of average
maturity 0 %5. basis points.
11
7iv8 Guara$tee: Banks, /Is, (B/3s are not permitted to provide guaranteeletter of
comfort.
7v8 Proce8ure: &ll E3Bs satisfying the above criteria will be under the auto route up to
ISK $. million for E3Bs between %05 years of average maturity and up to ISK 5..
million for E3Bs having average maturity of more than 5 years. &ll cases, which fall
outside the purview of the auto0route in the new liberali+ed E3B policy, should be
sub;ect to the approval by the Empowered 3ommittee of the *BI. <n similar lines,
guidelines for /oreign 3urrency 3onvertible Bonds 7/33Bs8 have been liberali+ed.
;. Co%pa$e! /I!!ue o7 I$8a$ Depo!tor6 Ru1e!2 ,<<=
9inistry of /inance 79o/8 has notified the 3ompanies 7Issue of Indian "epository
*ules8, $..C, applicable to those companies incorporated outside India desiring to raise
resources through Indian securities markets. The issuer company can issue Indian
"epository *eceipts 7I"*s8 only against its underlying e#uity shares. The rules re#uire
that the issuer companyFs pre0issue paid up capital and average turnover should be ISK
-.. millions and ISK 5.. millions, respectively. The company should also be making
profits for at least 5 years preceding the issue and must have declared dividend of at least
-.> during the period and has a pre0issue debt e#uity ratio of $:-. The issuer company
has to obtain prior permission from the SEBI and the necessary approvalsexemptions
from the country of its incorporation 7where re#uired8 for making the issue. /ollowing
the approval, issuer should appoint a number of intermediaries such as overseas
custodian bank, domestic depository, and a merchant banker. The issuer company should
also take in0principle listing approval from one or more stock exchanges having nation
wide trading terminals in India. The I"*s should be denominated in Indian *upees and
not exceed -5> of the total paid0up capital and free reserves of the company.
*edemptions are to be sub;ect to /E9& and other laws and cannot be made within one
year of their issue. In case of redemption, the underlying e#uity shares may be released
to the I"* holder or may be sold directly by him.
I$tat#e! 7ro% SEBI
12
I. SEBI /L!t$0 Aut(ort62 Re0u1ato$!) ,<<>
To bring about uniformity in scrutini+ing listing applications across the stock exchanges
and to strengthen the listing agreement, SEBI has established the 3entral Jisting
&uthority 73J&8 under the SEBI 73entral Jisting &uthority8 *egulations, $..%. The
important features of these regulations are as follows:
7i8 The 3entral Jisting &uthority 73J&8 is to be constituted by SEBI and should consist
of a ?resident and a maximum of ten other members, of which at least four members
should be representatives of the stock exchanges. The SEBI Board shall appoint the
?resident and the members from amongst persons having integrity and outstanding
ability from ;udiciary, lawyers, academicians, financial experts etc.
7ii8 The authority should discharge the following functions viz., processing the
application made for listing by any body corporate, 9/ or 3IS, issuing the letter of
recommendations, reviewing listing norms and any other functions as may be specified
by the Board from time to time.
7iii8 ?rior to applying for listing to any stock exchange, a body corporate, 9/ or 3IS
should obtain a letter of recommendations to list from the 3J&.
7iv8&ny exchange should not consider any listing application, unless it is accompanied
by a letter of recommendation issued by the 3J&.
7v8 In case, the 3J& refuses to issue letter of recommendation in accordance with the
procedure laid down in the *egulations, the aggrieved party may approach SEBI within
-. days of receipt of the refusal. If the SEBI is not satisfied with the reason, SEBI may
direct the 3J& to issue a letter of recommendation within -5 days of receipt of such
representation.
7vi8 If the exchange refuses listing to the body corporate, 9/ or 3IS, it may appeal to the
Securities &ppellate Tribunal 7S&T8 as provided in the Securities 3ontracts 7*egulation8
&ct, -456.
7vii8 The 3J& should also constitute a M/undF to be called the 3entral Jisting &uthority
/und, which should be constituted basically from the processing fees charged and
received by the &uthority.
II. A%e$8%e$t! to L!t$0 A0ree%e$t
13
SEBI advised the Stock Exchanges to initiate action against the listed companies, who
have not complied with the various re#uirements of the listing agreements. It has been
clarified that Section $%7$8 of the S37*8&, -456 prescribes punishment for violation and
non compliance of the provisions of listing agreement. /urther, in order to ensure that
listed companies do not in anyway violate or override or circumscribe the provisions of
securities laws or the stock exchange re#uirements, SEBI amended the clause $C of the
listing agreement. The amended clauses are as given below:
7a8 The company should file with the stock exchange for approval any schemepetition
proposed to be filed before any court or tribunal at least a month before it is presented to
the 3ourttribunal.
7b8 The company should ensure that any scheme of
arrangementamalgamationmergerreconstructionreduction of capital, etc., to be
presented to any 3ourt or Tribunal does not in any way violate, override or circumscribe
the provisions of securities laws or the stock exchange re#uirements. Securities law here
means the S3*& -456, the SEBI &ct, -44$, the "epositories &ct -446 and the
provisions of 3ompanies &ct -456 and the other rules, regulations, guidelines etc. made
under these &cts, and the Jisting &greement.
III. Mar0$ Tra8$0
'ith a view to improve li#uidity in the e#uity market, SEBI initiated steps to introduce
margin trading w.e.f. &pril -, $..C. The securities, eligible for margin trading, should
have an average impact cost of less than or e#ual to - and should be traded on at least
B.> 7,05>8 of the days for the previous eighteen months. <nly corporate brokers with
net worth of at least *s. % crore are eligible to offer this facility. They may use their own
or borrowed funds, however, their total indebtedness should not exceed 5 times their net
worth. The initial and maintenance margin is to be paid in cash and have to be a
minimum of 5.> and C.>, respectively. 'hile providing the margin trading facility, the
broker should be prudent and ensure that there is no concentration on any single client.
The
arbitration mechanism of the exchange is not available for grievances arising out of this
facility.
14
I;. E1041t6 o7 a Su4"4ro?er to Tra8e t(rou0( t(e Su4!8ar6 Co%pa$6
The Stock Exchanges had been allowed to set up subsidiary company to ac#uire
membership rights of other stock exchanges sub;ect to certain conditions prescribed by
SEBI. &s per the conditions stated in the SEBI directive, the subsidiary company could
register only the members of the parent stock exchange as sub0brokers of the subsidiary
company. !owever, it was noticed that the necessary changes have not been made in the
rules, bye0laws and the regulations of all the stock exchanges which have set up
subsidiaries and 9emorandum&rticles of &ssociation of the subsidiary company.
Therefore, all the stock exchanges, which have set up subsidiaries were directed to make
the necessary provisions in their rules, regulations and the bye0laws as well as in the
9emoranda&rticles of &ssociations to this effect.
;. L!t$0 &ee!
It has been decided by SEBI, that the stock exchanges should have the freedom to charge
listing fees without seeking prior approval from the SEBI. &ccordingly, the exchanges
have been directed to make necessary amendments to the bye0laws, rules and
regulationslisting agreement.
;I. Mar?"up $ re!pect o7 8e4e$ture! a$8 4o$8! tra8e8 o$ t(e Stoc? E@c(a$0e
Through a circular issued by SEBI on "ecember .4, -446, it has been stipulated that the
mark0up for the close out should be $.> above the official closing price for e#uities as
well as debentures and bonds. !owever, based on the recommendations of the &dvisory
3ommittee on "erivatives and 9arket *isk 9anagement it has now been decided that in
case of debentures and bonds with a credit rating &&& and above, close out mark0up of
5> should be applied. In cases where the credit rating is below &&&, then the existing
close out mark0up of $.> should be applicable.
;II. &ar Practce! a$8 Co8e o7 Co$8uct
& code of conduct for public representativesSEBI nominee directors has been notified
to ensure that the affairs of the stock exchanges are conducted on the healthy lines with
15
the highest standards of professional conduct, business ethics and morality. &lso the
guidelines enumerating fair practices have been notified. The public
representativesSEBI nominee directors should:
endeavor to attend all the board meetings. They should be liable to vacate their
office if they remain absent for three consecutive meetings of the Board of
"irectors or do not attend A5> of the total meetings of the Board in a calendar
year.
not participate in the discussion on sub;ects, which may involve any conflict of
interest or give rise to. If in case it happens then the same should be disclosed
and recorded in the minutes of the meetingH however, during the meeting the
agenda papers should not be circulated, unless circumstances re#uires.
meet at least once in 6 months separately, if necessary, to exchange views on
critical issues.
offer their comments on the draft minutes and ensure that the same are
incorporated in the final minutes. It should be ensured that the minutes of the
previous meeting are placed for approval in the subse#uent meeting.
endeavor to have the date of next meeting fixed at each Board 9eeting itself in
consultation with other members of the )overning Board. In case, all the items of
the agenda of a meeting are not covered, then next meeting is to be held within
-5 days.
participate in the formulation and execution of various strategies by being pro0
active in decision making in the Board meetings, so that the exchanges benefits
from their experience and expertise.
endeavor to ensure that the Exchange abides by all the provisions of the SEBI
&ct, Securities 3ontracts 7*egulation8 &ct, *ules, *egulations framed there
under and the circulars, directions issued by the )overnmentSEBI.
endeavour to make the regulatory system foolproof by ensuring compliance at all
levels of hierarchy in the Exchange. They should also ensure that the Exchange
honors the time limit prescribed by SEBI for corrective actions.
16
not support any decision of the Board, which may adversely affect the interest of
investors. They should report forthwith any such decision to SEBI.
make sure that the arbitral award is given within the period stipulated in the Bye0
Jaws, *ules or *egulations of the Exchange and in any case, the award is to be
delivered within -5 days after the final meeting.
priorities redressing of investor grievances by encouraging fair trade practice.
They should also make use of every opportunity to enhance and improve their
level of knowledge, so that they are able to resolve various issues arising in the
operations of the exchange with professional competence, fairness, impartiality,
efficiency and effectiveness.
submit the necessary disclosuresstatement of holdingsdealings in securities as
re#uired by the Exchange as per their *ules or &rticles of &ssociation.
maintain confidentiality about any information obtained in the discharge of their
duty unless otherwise re#uired by law. /urther, they should not use the
confidential information for their personal gains.
avoid any interest or activity which is in conflict with the conduct of their official
duties.
not engage in any act involving moral turpitude, dishonesty, fraud, deceit, or
misrepresentation or any other act pre;udicial to the administration of the
exchange.
;III. Corporate Go#er$a$ce $ L!te8 Co%pa$e!
3lause C4 of the listing agreement has been amended to include the recommendations as
prescribed by the committee on corporate governance set up under the chairmanship of
Shri (. *. (arayana 9urthy:
Co%po!to$ o7 Boar8: The board of directors of a company should have an optimum
combination of executive and non0executive directors. !owever, the non0executive
directors should not be less than 5.> of the directors. The number of independent
directors should be determined on the basis of the post held by the 3hairmanH in case of
a non0executive chairman, at least -%rd of board should comprise of independent
17
directors and if he is an executive chairman, then at least half of Board should comprise
of independent directors.
No$"E@ecut#e Drector!A Co%pe$!ato$ a$8 D!c1o!ure!3 &ll the compensation paid
to non0executive directors should be fixed by the Board and should be approved by
shareholders in general meeting. & limit should be placed for the maximum number of
stock options that can be granted to them in any financial year and in aggregate. In its
annual report, the company should publish its compensation philosophy, statement of
entitled compensation in respect of non0executive directors and the details of shares held
by non0executive directors.
I$8epe$8e$t Drector3 Independent "irector should periodically review the companyFs
legal compliance reports as well as the steps taken by the company. In the event of any
legal proceedings against an independent director in connection with the affairs of the
company, the defence would not be permitted on the ground that he was unaware of his
responsibility.
Boar8 Proce8ure3 The Board should meet at least four times a year, with a maximum
time gap of four months between any two meetings. & director should not be a member
in more than -. committees or act as 3hairman of more than five
committees across all companies in which he is a director. /urthermore, it should be
mandatory for all the directors to inform the company about the positions they occupy in
other companies every year and also notify changes as and when they take place.
Co8e o7 Co$8uct3 It is obligatory for the Board to lay down the code of conduct for all
its members and the senior management of the company, which should be posted on the
companyFs website. <n an annual basis, all the members of the Board and senior
management personnel should affirm compliance with the code. In addition,
the annual report should contain a declaration to this effect signed by the 3E< and 3<<.
Ter% o7 O77ce o7 No$"e@ecut#e 8rector!3 & person would be eligible for the office
of non0executive director so long as his term in the office has not exceeded nine years in
three terms of three years each, running continuously.
Bua17e8 a$8 I$8epe$8e$t Au8t Co%%ttee3 & #ualified and independent audit
committee with a minimum of three members comprising of a chairman and members
shall be set up. 'herein the chairman should be an independent director and ma;ority of
18
members should be independent directors. It is re#uired that all the members of audit
committee should be financially literate and at least one of them should have accounting
or related financial management expertise. The 3hairman should be present at &nnual
)eneral 9eeting to answer the #ueries of the shareholders. The audit committee should
invite executives, as it considers appropriate 7and particularly the head of the finance
function8 to be present at the meetings, but on occasions it may also meet without the
presence of any executives.
Au8t Co%%ttee3 The audit committee should meet at least thrice a year, but once
every six monthsH at least one meeting should be held before finali+ation of annual
accounts. The #uorum for the meeting should be either two members or one third of the
total membersH whichever is higher and minimum of two independent directors. The
committee is empowered to 7i8 investigate any activity within its terms of reference 7ii8
seek information from any employee 7iii8 obtain outside legal or other professional
advice 7iv8 secure attendance of outsiders with relevant expertise, if it considers
necessary.
Ro1e o7 Au8t Co%%ttee3 The role of the audit committee should be to 7a8 oversees
the companyFs financial reporting process and the disclosure made in the financial
statement and ascertains its accuracy, sufficiency and credibility
7b8 recommend the appointment and removal of external auditor, fixation of audit fee
and also approve payment for any other services 7c8 review the ade#uacy of internal
audit function, including the structure of the internal audit department, its staff, officials
heading the department, reporting structure coverage and fre#uency of internal audit.
/urther, the committee should discuss with internal auditors any significant findings and
follow them up 7d8 review the findings of any internal investigations into matters of a
suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board. &lso, the committee should discuss with external
auditors before the audit commences about nature and scope of audit. ?ost0audit the
committee should ascertain any area of concern regarding companyFs financial and risk
management policies. The &udit 3ommittee should also compulsorily review
information related to 7i8 financial statements and draft audit report, including
#uarterlyhalf0yearly financial informationH 7ii8 management discussion and analysis of
19
financial condition and results of operationsH 7iii8 reports relating to compliance with
laws and to risk managementH and 7iv8 management lettersletters of internal control
weaknesses issued by statutoryinternal auditors.
IC. L!t$0 o7 &urt(er I!!ue o7 Capta1
/ollowing the withdrawal of compulsory listing of companies on regional stock
exchange, it has been decided by the SEBI that a company should be listed on any of the
stock exchanges, which have a nationwide trading terminals. If the company is not listed
on any stock exchange having nationwide trading terminals, then it should continue to
obtain Min0principleF approval from all the exchanges where it is listed. The listing
agreement states: 1The 3ompany agrees to obtain Min0principleF approval for listing from
the exchanges having nationwide trading terminals where it is listed, before issuing
further shares or securities. 'here the company is not listed on any exchange having
nationwide trading terminals, it agrees to obtain such Min0principleF approval from all the
exchanges in which it is listed before issuing further shares or securities.2
C. A%e$8%e$t to SEBI /Depo!tore! a$8 Partcpa$t!2 /Seco$8 A%e$8%e$t2
Re0u1ato$! ,<<>
SEBI amended the SEBI 7"epositories and ?articipants8 *egulations -446 to include the
clauses regarding the manner of handling the share registry work, redressal of investor
grievances and maintenance of audit reports. &ll matters relating to transfer of securities,
maintenance of records of holders of securities, handling of physical securities should be
handled and maintained at a single point by establishing connectivity with the
depositories i.e. either in0house by the issuer or by a Share Transfer &gent 7ST&8
registered with the SEBI. Every issuer or its agent or any person who is registered as an
intermediary under this act, should redress the grievances of beneficial owners within
thirty days of the receipt of the complaint. Simultaneously, the depository should also be
informed about the number and nature of grievances redressed by it and number of
grievances pending before it. The issuers should submit the audit report on a #uarterly
20
basis, starting from September %., $..% to the concerned stock exchanges audited by a
#ualified 3hartered &ccountant or a practicing 3ompany Secretary.
CI. A%e$8%e$t to SEBI /&II2 /Seco$8 A%e$8%e$t2 Re0u1ato$! ,<<>
The SEBI 7/oreign Institutional Investors8 *egulations has been amended by the SEBI
to include the new clauses as stated herewith. The /IIs should fully disclose information
concerning the terms of and parties to off0shore derivative instruments such as
?articipatory (otes 7?0(otes8, E#uity Jinked (otes 7EJ(8 or any other such instruments
listed or proposed to be listed. The code of conduct has also been
specified which states that 7a8 a /II and its key personnel should observe high standards
of integrity, fairness and professionalism in all their dealings with intermediaries,
regulatory and other government authorities in the Indian securities market. They should,
at all times, render high standards of serviceH exercise due diligence and independent
professional ;udgment 7b8 a /II should ensure and maintain confidentiality in respect of
trades done on its own behalf andor on behalf of its sub0accountsclients. There should
be clear segregation of its own moneysecurities and sub0accountsF moneysecuritiesH
arms length relationship should be maintained between its business of fund
managementinvestment and its other business 7c8 a /II should maintain an appropriate
level of knowledge and competency and abide by the provisions of the &ct, regulations
made there under and the circulars and guidelines applicable and relevant to them. Every
/II should also comply with award of the <mbudsman and decision of the Board under
SEBI 7<mbudsman8 *egulations, $..% 7d8 a /II should not make any untrue statement
or suppress any material fact in any documents, reports or information furnished to the
Board 7e8 they should ensure that good corporate policies and corporate governance are
observed and do not engage in fraudulent and manipulative transactions in the securities
listed in any stock exchange in India 7f8 a /II andor any of its affiliates should not
indulge in any insider trading, should not be a party to or instrumental for creation of
false market in securities listed or proposed to be listed in any stock exchange in India.
They should not be involved in price rigging or manipulation of prices of securities
listed or proposed to be listed in any stock exchange in India.
21
CII. SEBI /Ce$tra1 Data4a!e o7 Mar?et Partcpa$t!2 Re0u1ato$! ,<<>
The SEBI 73entral "atabase of 9arket ?articipants8 *egulations, $..% intends to
develop an inventory of 9arket ?articipants and Investors and also set up standards for
client code. It places a mandatory obligation on all entities under the ;urisdiction of SEBI
and specified investors to obtain uni#ue identification number under 9&?I database.
The main features of this regulation are as cited: 7a8 every investor, listed
company, company intending to get its securities listed, intermediary and other entities
should make applications for allotment of uni#ue identification numbers 7II(s8 for itself
and for its related persons 7b8 the application made by a specified intermediary or any
other entity should be in a specified form. <n receipt of an application, the designated
service provider should allot to the applicant a II(. In case of any defect, the designated
service provider should give the applicant an opportunity to rectify it within a period of
-5 days from the date of the intimation or within the period approved by the Board. If
the defect is not rectified within the allotted time period, then the designated service
provider should refer the application to the SEBI board 7c8 if uni#ue identification
number was obtained through fraud or
misrepresentation or was allotted to a person by mistake, the Board may, after giving
him an opportunity of making representations, revoke the II( allotted to him or to the
related persons. <nce the II( is revoked, the person will be treated as if no II( was
allotted to him. In case a person issues any security or buys, sells or deals in any
securities in contravention of these regulations, they would be liable for suspension from
trading or may be debarred from dealing in the securities market, or any other action as
may be deemed appropriate by the Board.
CIII. D!c1o!ure o7 Propretar6 Tra8$0 46 Bro?er! to C1e$t
To increase the transparency in the dealings between the broker and the client, it has
been decided that every broker should disclose to his client whether he does client based
business or proprietary trading as well. This should be disclosed to all his existing clients
and also to his new clients at the time of entering into the MLnow Nour 3lientF
agreement. In case of a broker who at present does not trade on proprietary account,
22
chooses to do so at a later date, he is re#uired to disclose this to his clients before
carrying out any proprietary trading.
CI;. Tra8$0 46 Me%4er!9Su4"4ro?er!
Since certain memberssub0brokers deal through a large number of other stock
brokerssub0brokers on the same exchangeother exchanges for their proprietary trades
as well as trades on behalf of their clients, SEBI has prohibited these transactions, except
with the prior permission of the exchange. &fter the stock exchange considers the reason
stated by the broker0sub0broker for such transactions and carry out due diligence, it
should permit such deals with only one brokersub0broker registered with it. The stock
brokersub0broker of an exchange can deal with only one brokersub0broker of another
exchange for proprietary trading after intimating the names of such stock brokersub0
broker to his parent stock exchange
C;. D!c1o!ure o7 Tra8e Deta1! o7 Bu1? Dea1!
SEBI has decided to bring about greater disclosure in the nature of the bulk deals.
&ll transactions in scrip where total #uantity of shares boughtsold is more than ..5> of
the outstanding e#uity shares of that company are considered to be bulk deals. The
brokers should disclose to the stock exchange the name of the scrip, name of the client,
#uantity of shares boughtsold and the traded price. Immediately after executing the
trade, the brokers should intimate the exchange and the stock exchange, in turn, should
disseminate the aforesaid information on the same day after the market hours to the
general public.
C;I. C(a$0e! $ t(e Na%e o7 t(e L!te8 Co%pa$e!
&ll listed companies, which decide to change their names, are re#uired to comply with
certain provisions: 7i8 They have to maintain a time period of at least one year before the
last name change 7ii8 &t least 5.> of its total revenue in the preceding one year period
should have been accounted for by the new activity suggested by the new name 7iii8 The
new name along with the old name should be disclosed through web sites of the
23
respective stock exchanges where the company is listed and also through E"I/&* web
site for a continuous period of one year from the date of last name change.
C;II. Re8ucto$ $ Notce Pero8 7or &@$0 t(e Boo? C1o!ure9Recor8 Date
<n receiving representations from various #uarters and in view of the ma;or structural
changesdevelopments in the secondary markets, SEBI decided to reduce the notice
period which the listed companies have to give to the stock exchanges before their book0
closurerecord date. In the first phase, the said notice period has been reduced to -5
calendar days from %. days in case of demateriali+ed scrips and from C$ days to $-
calendar days in case of physical scrips.
I$tat#e! 7ro% RBI
I. &I! Tra8$0 $ GOI Securte!
'ith a view to facilitate participation of the financial institutions 7/Is8 for trading in
government securities on the stock exchanges, the /Is have to follow the procedure
mentioned below:
-. /Is should open demat accounts with the "epository ?articipant 7"?8 of either
(S"J3"SJ, in addition to their S)J &ccounts with *BI.
$. @alue free transfer, 7i.e. transfer of the )<I securities from the S)J3S)J account to
the demat account of the same party8 of securities between S)J3S)J and demat
accounts should be enabled sub;ect to operational guidelines.
%. /Is should also ensure: 7a8 to obtain specific approval from their Board of "irectors to
enable them to trade in )overnment securities on the stock exchanges, 7b8 they should
put in place necessary infrastructure, risk management systems and appropriate internal
control systems for tradingsettlement of )overnment securities on stock exchanges 7c8
their transactions through any single broker should be sub;ected to the extant guidelines
on dealings through brokers 7d8 all their trades should be settled either directly with
24
clearing corporationclearing house or else through clearing member custodians 7e8 at the
time of trade, securities should be available with the /Is either in their S)J account with
*BI or in demat account with depositories 7f8 the purchase transactions by the /Is should
be sub;ect to availability of clear funds in their settlement accounts at the time of pay0in,
7g8 all pay0out of funds should invariably be out of clear funds, i.e. the pay out must not
be contingent upon the outcome of any clearing to be conducted on that day.
C. &ny settlement failure on account of non0delivery of securitiesnon0availability of
clear funds should be treated as S)J bouncing and the penalties in respect of S)J
bouncing should be applicable.
5. &ll the details of transaction in )overnment securities, on aggregate basis, undertaken
on the stock exchanges and particulars of any 1closed out2 should be reported to the
audit committee of the Board.
In the mid0term review of the monetary and credit policy, *BI has permitted sale of
)overnment security already contracted for purchase sub;ect to two conditions: 7a8 the
purchase contract is confined prior to the sale, is guaranteed by 33IJ or the security is
contracted for purchase from the *BIH 7b8 the sale transaction settles either in the same
settlement cycle as the preceding purchase contract so that the delivery obligation under
the sale contract is met by the securities ac#uired under the purchase contract.
II. De"reco0$to$ o7 O#er!ea! Corporate Bo8e! a! a$ I$#e!tor C1a!!
*BI in consultation with the )overnment have de0recogni+ed <verseas 3orporate
Bodies 7<3Bs8 in India as an eligible Mclass of investorF under various routesschemes
available under extant /oreign Exchange 9anagement *egulations. In addition,
following measures have also been initiated 7i8 an unincorporated entity also should not
be allowed to make fresh investments under the /oreign "irect Investment scheme
including the automatic route. !owever, the unincorporated entities and <3Bs may
continue to hold shares and convertible debentures till they are soldredeemed 7ii8 they
should also not undertake purchase of )overnment dated securities or treasury bills or
units of domestic 9/s or units of 9oney 9arket 9utual /unds 7999/s8 in India or
(ational ?lanSavings 3ertificates both on repatriation and no repatriation basis.
!owever, they may continue to hold these securities till they are soldmatured 7iii8 a
25
person resident outside India including <3Bs should not transfer by way of sale or gift,
the shares or convertible debentures held by them to another <3B 7iv8 <3Bs should not
purchase e#uity or preference shares or convertible debentures offered on right basis by
an Indian company. & person resident in India should also not borrow in foreign
currency from <3Bs 7v8 an Indian company should not borrow in rupees on repatriation
and non0repatriation basis from <3Bs by way of investment in (on03onvertible
"ebentures7(3"s8 7vi8 an Indian company, a proprietorship concern or a firm in India
should not accept
deposits from <3Bs on non0repatriation basis 7vii8 <3Bs should not open and maintain
(on0*esident 7External8 *upee &ccount 7(*E8, /oreign 3urrency 7(on0*esident8
&ccount 7Banks8O/3(*7B8P &ccounts and (on0*esident <rdinary *upee 7(*<8
"eposit &ccount with &uthori+ed "ealers in India. 7viii8 no new (*E/3(*(*<
&ccounts in the name of <3Bs should be opened and no renewal of deposits should be
made. &s regards with investment on repatriation basis, authori+ed dealers 7&"s8 may
allow repatriation as authori+ed. /or investment on non0repatriation basis, &"s should
arrange to obtain re#uests for disposal of funds from their <3B clients and seek the
specific approval for each case from the *BI. The ban imposed on <3Bs under ?IS vide
a circular issued earlier shall continue. !owever, they are allowed to hold the shares and
convertible debentures purchased under ?IS till such time these are sold on Stock
Exchange in India. It has also been clarified that the de0recognition of <3Bs as a
separate category of investor meant withdrawal of special facilities made available to
them. !owever, the overseas entities owned by (*Is remain unaffected of the same.
III. Ba$? &$a$c$0 o7 EDute! a$8 I$#e!t%e$t! $ S(are!
&s per the *BI directive, banks were re#uired to apply a uniform margin of C.> on all
advances against sharesfinancing of I?<Fsissue of guarantees. & minimum cash margin
of $. per cent 7within the margin of C.>8 is also to be applied in respect of guarantees
issued by the banks. This has been reviewed and it has been raised to a uniform margin
of 5.> to all fresh advancesguarantees issued. & minimum cash margin of $5> 7within
the margin of 5.>8 should be maintained in respect of guarantees issued by banks for
26
capital market operations. The existing advancesguarantees issued may continue at the
earlier margins until they come up for renewal.
END O& CHAPTER III
CHAPTER IV - STOCK MARKET DESIGN &ACTS AND &IGURES
t the end of 9arch $..C, there were $% operative stock exchanges with 4,%6B
registered brokers and -$,B-5 registered sub0broker trading on them
7&nnexure C0-8. The stock exchanges need to be recogni+ed under the &
27
Securities 3ontracts 7*egulation8 &ct, -456. <f the $% recogni+ed stock exchanges, only
% exchanges 79umbai, &hmedabad, and 9adhya ?radesh8 are organi+ed in the form of
1&ssociation of ?ersons2, while the rest are organi+ed as limited companies. Except
(SE, all exchanges are not-for-profit making organi+ations. *eali+ing the problems of
a non0demutualised set up, a committee under the chairmanship of 3hief Gustice 9. !.
Lania was set up 7i8 to review the present structures of stock exchanges 7ii8 to examine
the legal, financial and fiscal issues involved to corporatise and demutualise the stock
exchanges, and recommend the specific steps that need for demutualisation, and 7iii8 to
advise on the consolidation and merger of the stock exchanges. The committee
recommended a uniform model of demutualisation and corporatisation and advised the
stock exchanges to initiate the process of getting demutualised. &s on date only two
exchanges viz., (SE and <T3EI are demutualised and others are in the process of
getting demutualised.
A. &u$cto$! o7 !toc? e@c(a$0e!
tock exchanges provide li#uidity to the listed companies. By giving #uotations
to the listed companies, they help trading and raising funds from the market.
Savings of investors flow into public loans and to ;oint0stock enterprises
because of this ready marketability and une#ualled facility for transfer of ownership of
stocks, shares and securities provided by the recogni+ed stock exchanges. &s a result,
over the hundred and twenty years during which the stock exchanges have existed in this
country and through their medium, the 3entral and State governments have raised crores
of rupees by floating public loans H 9unicipal corporations, Improvement trusts Jocal
Bodies and State /inance 3orporations have obtained from the public their financial
re#uirements, and industry , trade and commerce0the backbone of countryFs economy Q
have secured capital of crores of rupees through issue of stocks, shares and debentures
for financing their day to day re#uirements, organi+ing new ventures and completing
pro;ects of expansion , diversification and moderni+ation. By obtaining the listing and
trading facilities, public investment is increased and companies were able to raise more
S
28
funds. The #uoted companies with wide public interest have en;oyed some benefits and
asset valuation has become easier for tax and other purposes.
In line with the growth in the new issues market during the eighties, the secondary
market also expanded fast during this period. The number of stock exchanges has
increased from B in -4B. to a total $C in -446. The membership of the stock exchanges
has also increased substantially over the years. The number of listed companies has also
increased and the market capitali+ation has also shown a substantial increase. The
volume of daily turnover of trade and the number of dealings per day have gone up
sharply.
B. Me%4er!(p
he trading platform of a stock exchange is accessible only to brokers. They
play a significant role in the secondary market by bringing together the buyers
and sellers. The brokers input buysell orders either on his own account or on
behalf of clients. The clients may place their orders either with them directly or through
a sub0broker indirectly. Thus, as these buy and sell order matches, the trades are
executed. The exchange can admit a broker as its member only on the basis of the terms
specified in the Securities 3ontracts 7*egulation8 &ct, -456, the SEBI &ct -44$, the
rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the
concerned exchange. (o stock broker or sub0broker is allowed to buy, sell or deal in
securities, unless he or she holds a certificate of registration from the SEBI. The stock
exchanges, however, are free to stipulate stricter re#uirements than those stipulated by
the SEBI. The minimum standards stipulated by (SE are in excess of those laid down by
the SEBI. The (SE admits members based on factors, such as, corporate structure,
capital ade#uacy, track record, education, and experience 7Table C0$8. This reflects a
conscious decision of (SE to ensure #uality broking services. The authorities have been
encouraging corporatisation of the broking industry. &s a result, a number of brokers0
proprietor firms and partnership firms have converted themselves into corporates. &s at
end09arch $..C, there were brokers 4,%6B 7including multiple registrations8 registered
T
29
with SEBI as compared to 4,5-4 brokers as at end09arch $..%. &s of end09arch $..C,
%,ABA brokers, accounting for nearly C.> of total have become corporate entities.
&mongst those registered with (SE around BB.4A> of them were corporatised, followed
by <T3EI with AA.B5> corporate brokers. &s at end09arch $..C, there were -$,B-5
sub0brokers registered with SEBI, as compared with -%,$4- sub0brokers as at end of
previous year. There were a total of -C- additions of members during the year $..%0.C,
whereas $4$ were membership cases of reconciliation cancellationsurrender. (SE and
BSE together constituted BB.$4> of the total sub0brokers.
C. L!t$0 o7 Securte!
isting means formal admission of a security to the trading platform of a stock
exchange. Jisting of securities on the domestic stock exchanges is governed
by the provisions in the 3ompanies &ct, -456, the Securities 3ontracts
7*egulation8 &ct, -456 7S37*8&8, the Securities 3ontracts 7*egulation8 *ules 7S37*8*8,
-45A, the circularsguidelines issued by 3entral )overnment and SEBI. In addition, they
are also governed by the rules, bye0laws and regulations of the concerned stock
J
30
exchange and by the listing agreement entered into by the issuer and the stock exchange.
Some of the key provisions are enumerated below:
-. The 3ompanies &ct, -456 re#uires a company intending to issue securities to the
public should seek a permission from one or more recogni+ed stock exchanges for its
listing. If the permission is not granted by all the stock exchanges before the expiry of -.
weeks from the closure of the issue, then the allotment of securities would be void. &lso,
a company may prefer to appeal against refusal of a stock exchange to list its securities
to the Securities &ppellate Tribunal 7S&T8. The prospectus should state the names of the
stock exchanges, where the securities are proposed to be listed.
$. The bye0laws of the exchanges stipulate norms for the listing of securities. &ll listed
companies are under obligation to comply with the conditions of listing agreement with
the stock exchange where their securities are listed. If they fail to comply with them,
then they are punishable with a fine up to *s. -,....
%. The S37*8* prescribe re#uirements with respect to the listing of securities on a
recogni+ed stock exchange and empowers SEBI to waive or relax the strict enforcement
of any or all of them.
C. The listing agreement states that the issuer should agree to adhere to the agreement of
listing, except for a written permission from the SEBI. &s a precondition for the security
to remain listed, an issuer should comply with the conditions as may be prescribed by
the Exchange. /urther, the securities are listed on the Exchange at its discretion, as the
Exchange has the right to suspend or remove from the list the said securities at any time
and for any reason, which it considers appropriate.
5. & SEBI circular asserts that the basic norms of listing on the stock exchanges should
be uniform across the exchanges. !owever, the stock exchanges can prescribe additional
norms over and above the minimum, which should be part of their bye0laws. SEBI has
been issuing guidelinescirculars prescribing certain norms to be included in the listing
agreement and to be complied by the companies.
6. The stock exchanges levy listing fees on the companies, whose securities are listed
with them. The listing fee has two components0initial fee and annual fee. 'hile, initial
fee is a fixed amount, the annual fee varies depending upon the si+e of the company.
(SE charges *s. A,5.. as initial fees. /or companies with a paid0up share andor
31
debenture capital of less than or e#ual to *s. - crore annual listing fees is *s. C,$... /or
companies with a paid0up share andor debenture capital of more than *s. 5. crore, the
annual listing fees is *s. A.,... plus *s. -,C.. for every additional *s. 5 crore or part
thereof. & number of re#uirements, under the S37*8*, the bye0laws, the listing
agreement have to be continuously complied with by the issuers to ensure continuous
listing of its securities. The listing agreement also stipulates the disclosures that have to
be made by the companies. In addition, the corporate governance practices enumerated
in the agreement have to be followed. The Exchange is re#uired to monitor the
compliance with re#uirements. In case a company fails to comply with the re#uirements,
then trading of its security would be suspended for a specified period, or
withdrawaldelisting, in addition to penalty as prescribed in the S37*8&.
D. Tra8$0 Mec(a$!%
SE was the first stock exchange in the country to provide nation0wide,
anonymous, order driven, screen0based trading system, known as the
(ational Exchange for &utomated Trading 7(E&T8 system. The member
inputs, in the (E&T system, the details of his order such as the #uantities and prices of
securities at which he desires to transact. The transaction is executed as soon as it finds a
matching sale or buys order from a counter party. &ll the orders are electronically
matched on a pricetime priority basis. This has resulted in a considerable reduction in
time spent, cost and risk of error, as well as frauds, resulting in improved operational
efficiency. It allows for faster incorporation of price sensitive information into prevailing
prices, as the market participants can see the full market on real time basis. This
increases informational efficiency and makes the market more transparent. /urther, the
system allows a large number of participants, irrespective of their geographical
locations, to trade with one another simultaneously, improving the depth and li#uidity of
the market. & single consolidated order book for each stock displays, on a real time
basis, buy and sell orders originating from all over the country. The book stores only
limit orders, which are orders to buy or sell shares at a stated #uantity and stated price,
are executed only if the price #uantity conditions match. Thus, the (E&T system
(
32
provides an <pen Electronic 3onsolidated Jimit <rder Book 7<E3J<B8, which ensures
full anonymity by accepting orders, big or small, from members without revealing their
identity. Thus, provides e#ual access to all the investors. & perfect audit trail, which
helps to resolve disputes by logging in the trade execution process in entirety, is also
provided. The trading platform of the 39 segment of (SE is accessed not only from the
computer terminals, but also from the personal computers of the investors through the
Internet and from the hand0held devices through '&?. SEBI has allowed the use of
internet as an order routing system for communicating investorsF orders to the exchanges
through the registered brokers. These brokers should obtain the permission from their
respective stock exchanges. In /ebruary $..., (SE became the first exchange in the
country to provide web0based access to investors to trade directly on the Exchange
followed by BSE in 9arch $..-. The orders originating from the ?3s of investors are
routed through the internet to the trading terminals of the designated brokers with whom
they have relations and further to the exchange. &fter these orders are matched, the
transaction is executed and the investors get the confirmation directly on their ?3s. SEBI
has also allowed trading through wireless medium or 'ireless &pplication ?rotocol
7'&?8 platform. (SE is the only exchange to provide access to its order book through
the hand held devices, which use '&? technology. This particularly helps those retail
investors, who are mobile and want to trade from any place.
E. Tec($o1o06
ith the developments in communication and network technologies, there
has been a paradigm shifts in the operations of the securities market
across the globe. Technology has enabled organi+ations to build new
sources of competitive advantage, bring about innovations in products and services, and
provide new business opportunities. Stock exchanges all over the world have reali+ed the
potential of IT and have moved over to electronic trading systems, which have wider
reach and provide a better mechanism for trade and post trade execution. )iven the
importance of technology in shaping the securities industry, (SE has been emphasi+ing
on innovations and sustained investments in technology. (SE is the first exchange in the
'
33
world to use satellite communication technology for trading and also has the largest
@S&T0based trading network in the world and largest @S&T network for any purpose in
the &sia ?acific region. It uses satellite communication technology to energi+e
participation from more than $,B.. @S&Ts from approximately %65 cities spread all
over the country. It has been continuously undertaking capacity enhancement measures
so as to effectively meet the re#uirements of increased users and associated trading
loads. (SEFs trading system called the (ational Exchange for &utomated Trading
7(E&T8, is a state of0the0art client server based application. &t the serverFs end all the
trading information is stored in an in0memory database to achieve a minimum response
time and maximum systems availability for users. It has uptime records of 44.A>. The
system also ensures data integrity with past record of single error in -. million bits. /or
all trades entered into the (E&T system, there is uniform response time of less than -.5
seconds. (SE has also put in place (IBIS 7(SEFs internet Based Information System8
for on0line real0time dissemination of trading information through its website. &s part of
its business continuity plan, (SE has established a disaster back0up site at 3hennai along
with its entire infrastructure, including the satellite earth station. This site at 3hennai is a
mirror replica of the complete production environment at 9umbai. The link between the
two is through a high0speed optical fiber and the transaction data is backed up on near
real time basis from the main site to the disaster back0up site to keep both the sites
synchroni+ed with each other all the time.
&. Tra8$0 Ru1e!
$!8er Tra8$03 Insider trading is considered an offence and is hence prohibited.
The SEBI 7?rohibition of Insider Trading8 *egulations, -44$ prohibits an insider
from dealing 7on his own behalf or on behalf of others8 in listed securities on the
basis of Munpublished price sensitive informationF. It also prohibits communicating,
counseling or procuring such information from any other person to deal in securities of
any company on the basis of such information. ?rice sensitive information for a security
is any information, which if published, is likely to affect its price. It includes information
regarding the financial results of the company, intended declaration of dividends, issue
I
34
of securities or buy back of securities, amalgamation, mergers, takeovers, and any ma;or
policy changes. SEBI, on the basis of any complaint or otherwise, is empowered to
investigateinspect these allegation of insider trading. If a person is found prima facie
guilty of insider trading, then SEBI may prosecute persons in an appropriate court or
pass such orders as it may deem fit. In order to strengthen insider trading regulations,
SEBI has mandated a code of conduct for listed companies, its employees, analysts,
market intermediaries and professional firms. The insider trading regulations re#uire
initial and continuous disclosure of shareholding by directors, officers and ma;or
shareholders 7holding more than 5> sharesvoting rights8. The companies are also
mandated to adopt a code of disclosure with regards to price sensitive information,
market rumors, reporting of shareholdingownership, etc.
$7ar Tra8e Practce!3 The SEBI 7?rohibition of /raudulent and Infair
Trade ?ractices in relation to the Securities 9arket8 *egulations, -445
empowers SEBI to investigate into cases of market manipulation, fraudulent
and unfair trade practices. The regulations define frauds as acts committed by a party of
the contract or by his agent, with intent to deceive another party or his agent or to induce
him to enter into the contract. The regulations specifically prohibit market manipulation,
misleading statements to induce sale or purchase of securities, and unfair trade practices
relating to securities. Inder these regulations, SEBI can investigate into violations
committed by any person, including an investor, issuer or an intermediary, suo moto or
upon information received by it. Based on the report of the investigating officer, SEBI
can initiate action for suspension or cancellation of registration of an intermediary.
U
a?eo#er!3 The restructuring of companies through takeover is governed by
the SEBI 7Substantial &c#uisition of Shares and Takeovers8 *egulations,
-44A. The *egulations were formulated so that the process of ac#uisitions
and takeovers is carried out in a well0defined and orderly manner following the
principles of fairness and transparency. &s per the regulations, the mandatory public
offer is triggered on:
T
35
crossing the threshold limit of -5>,
crossing the creeping ac#uisition limit of -5> or more but less than A5> of
shares or voting rights of a target company,
&ttempts by persons having A5> or more to ac#uire more shares.
The regulations give enough scope for existing shareholders to consolidate and also
cover the scenario of indirect ac#uisition of control. The applications for takeovers are
scrutini+ed by the Takeover ?anel constituted by the SEBI.
u6 Bac?3 Buy back is done by the company with the purpose to improve
li#uidity in its shares and enhance the shareholdersF wealth. Inder the SEBI
7Buy Back of Securities8 *egulations, -44B, a company is permitted to buy
back its shares from:
B
7a8 existing shareholders on a proportionate basis through the offer documentH
7b8 open market through stock exchanges using book building processH and
7c8 shareholders holding odd lot shares.
The company has to disclose the pre and post0buy back holdings of the promoters. To
ensure completion of the buy back process speedily, the regulations have stipulated
time limit for each step. /or example, in the cases of purchases through stock exchanges,
an offer for buy back should not remain open for more than %. days. The verification of
shares received in buy back has to be completed within -5 days of the closure of the
offer. The payments for accepted securities has to be made within A days of the
completion of verification and bought back shares have to be extinguished and
physically destroyed within A days of the date of the payment. /urther, the company
making an offer for buy back will have to open an escrow account on the same lines as
provided in takeover regulations.
rcut Brea?er!3 @olatility in stock prices is a cause of concern for both the
policy makers and the investors. To curb excessive volatility, SEBI has
prescribed a system of circuit breakers. The circuit breakers bring about a
nation0wide coordinated halt in trading on all the e#uity and e#uity derivatives markets.
&n index based market0wide circuit breaker system applies at three stages of the index
C
36
movement either way at -.>, -5> and $.>. The breakers are triggered by movement of
either SD? 3(E (ifty or Sensex, whichever is breached earlier. /urther, the (SE views
entries of non0genuine orders with utmost seriousness as this has market0wide
repercussion. It may suo0moto cancel the orders in the absence of any immediate
confirmation from the members that these orders are genuine or for any other reason as it
may deem fit. &s an additional measure of safety, individual scrip0wise price bands have
been fixed as below:
"aily price bands of $> 7either way8 on a set of specified securities,
"aily price bands of 5> 7either way8 on a set of specified securities,
"aily price bands of -.> 7either way8 on another set of specified securities,
?rice bands of $.> 7either way8 on all remaining securities 7including
debentures, warrants, preference shares etc. which are traded on 39 segment of
(SE8,
(o price bands are applicable on scrips on which derivative products are
available or on scrips included in indices on which derivatives products are
available.
/or auction market the price bands of $.> are applicable. In order to prevent members
from entering orders at non0genuine prices in these securities, the Exchange has fixed
operating range of $.> for such securities.
e%at Tra8$03 & depository holds securities in dematerialised form. It
maintains ownership records of securities in a book entry form, and also
effects transfer of ownership through book entry. Though, the investors have
a right to hold securities in either physical or demat form, SEBI has made it compulsory
that trading in securities should be only in dematerialised form. This was initially
introduced for institutional investors and was later extended to all investors. The
companies, which fail to establish connectivity with both the depositories on the
scheduled date as announced by SEBI, their securities are traded on the Mtrade for tradeF
settlement window of the exchanges. &t the end of 9arch $..C, the number of
companies connected to (S"J and 3"SJ were 5,$-$ and C,A$., respectively. The
D
37
number of dematerialised securities have increased from A6.4 billion at the end of 9arch
$..% to 4A.A billion at the end of 9arch $..C. "uring the same period the value of
dematerialised securities has increased from *s. 5,BA5 billion to *s. -.,A.- billion.
Since the introduction of the depository system, demateriali+ation has progressed at a
fast pace and has gained acceptance amongst the market participants. &ll actively traded
scrips are held, traded and settled in demat form.
G. C(ar0e! 7or Ser#ce!
s per SEBI *egulations, every stockbroker, on the basis of his total turnover,
is re#uired to pay annual turnover charges, which are to be collected by the
stock exchanges. In order to share the benefits of efficiency, (SE has been
reducing the transaction charges over a period of time. &t present a trading member is
re#uired to pay the exchange transaction charges R....C> 7*s. C per *s.- lakh8 of the
turnover.
&
The maximum brokerage chargeable by a broker is fixed at $.5> of the contract price,
exclusive of statutory levies like, SEBI turnover fee, service tax, and stamp duty. This is
inclusive of the brokerage charged by the sub0broker, which should not exceed -.5> of
contract price. !owever, the brokerage charged varies from clients to clients. There are
instances wherein brokerage as low as ..-5> has been charged.
Stamp duties are payable as per the rates prescribed by the relevant states. In
9aharashtra, it is charged R *e. - for every *s. -.,... or part thereof 7i.e. ...->8 of
the value of security at the time of its purchasesale as the case may be. !owever, if the
securities are not delivered, it is levied R $. paise for every *s. -.,... or part there of
7....$>8. The depositories provide depository services to investors through depository
participants 7"?s8. They do not charge the investors directly, but charge their "?s who
are free to have their own free structure for their clients. The depositories, however, have
been reducing their charges from "?s over a period of time. The charges levied on "?s
by (S"J and 3"SJ are presented in Table C0Cb.
38
H. I$!ttuto$a1 Tra8e!
rades by 9utual /unds and /oreign Institutional Investors are termed as
Institutional trades, Transactions by 9/s in the secondary market are
governed by SEBI 79utual /unds8 *egulations, -446. & 9/ under all its
schemes is not allowed to own more than -.> of any companyFs paid0up capital. They
are allowed to do only Mdelivery0basedF transactions. & 9/ cannot invest more than -.>
of the (&@ of a particular scheme in the e#uity shares or e#uity related instruments of a
single company. The investments by /IIs are governed by the rules and regulations of
the *BI and the SEBI. &s per the *BI guidelines, each /II can invest up to -.> of the
paid0up capital of a companyH however, the total /II investment should not exceed $C>.
This can, however, be increased up to the sectoral capstatutory ceiling, as applicable,
provided the Indian companyFs board of directors and also its general body approve it.
&s per the SEBI guidelines, all /II transactions are to be routed through a registered
member of a recogni+ed stock exchange in India. /IIs have to necessarily give and take
delivery of securities sold and bought.
T
I. I$8e@ Ser#ce!
39
stock index consists of a set of stocks that are representative of either the
whole market, or a specified sector. It helps to measure the change in overall
behaviour of the markets or sector over a period of time. (SE and 3*ISIJ,
in technical partnership with Standard D ?oorFs, have ;ointly promoted the India Index
Services D ?roducts Jimited 7IISJ8. The IISJ provides stock index services by
developing and maintaining an array of indices for stock prices. IISJ is the only
speciali+ed organi+ation of this type in the country. IISJ maintains a number of e#uity
indices comprising broad0based benchmark indices, sectoral indices and customi+ed
indices. The most popular index is the SD? 3(E (ifty, followed by the 3(E (ifty
Gunior, SD? 3(E "efty, SD? 3(E 5.., 3(E 9idcap $.., SD? 3(E Industry indices
7for A% industries8 and 3(E IT Index. These indices are monitored and updated
dynamically and are reviewed regularly. These are maintained professionally to ensure
that it continues to be a consistent benchmark of the e#uity markets, which involves
inclusion and exclusion of stocks in the index, day0to0day tracking and giving effect to
corporate actions on individual stocks. SD? 3(E (ifty is a well diversified 5. stock
index accounting for $C sectors of the economy. It accounted for 56.4A> of total market
capitali+ation of 39 segment of (SE as at end09arch $..C. The total traded value of all
(ifty stocks is approximately AA> of the traded value of all the stocks on the (SE. 3(E
(ifty Gunior accounts for --.6> of the market capitali+ation in (SE. &fter carrying out a
number of iterations, it was felt that Indian stock market had comfortable li#uidity at
around 5. stocks. Beyond 5., the li#uidity levels became increasingly lower. !ence the
index set si+e of 5. stocks was chosen. The stocks included in the (ifty index are
selected on the basis of their impact cost, li#uidity and market capitali+ation. The
composition of (ifty is reviewed at every #uarter. The index is calculated afresh every
time a trade takes place in any of the index stock. It is calculated on0line and
disseminated over trading terminals across the country. &nnexure C0$ to C05 present the
market capitali+ation, weightage, beta and monthly returns of the SD? 3(E (ifty stocks
for the period &pril $..%09arch $..C. SD? 3(E (ifty was introduced considering the
fact that it would not only be used for reflecting the stock market behavior accurately,
but also for modern applications such as index funds and index derivatives. It has
become the most popular and widely used stock market indicator in the country. Index
&
40
futures and options have been launched based on SD? 3(E (ifty index and on 3(E IT
Index. /utures contracts based on SD? 3(E (ifty have also been launched at the
derivative exchange at Singapore. It is the only Indian index0based derivative product
traded on a foreign exchange.
E. Mar?et Outco%e
ur$o#er GroFt( a$8 D!tr4uto$3 Trading volumes in the e#uity
segments of the stock exchanges have witnessed phenomenal growth over the
last few years. 'hile it has increased from *s. -.,$%%,B$. million in -44B044
to *s. $B,B.4,4.. million in $...0.-, it witnessed a slump during $..-0.$ registering
volumes of only *s. B,45B,-B. million. The traits of recovery in the market are visibly
seen for the last two years. The volumes have risen to *s. 4,6B4,.4% million in $..$0.%
and further to *s. -6,$.C,4AA million in $..%0.C. In percentage terms there has been a
growth of 6A.$4> in $..%0.C over the previous
T
yearFs volume 7Table C058. The monthly trading value of the 39 segment on (SE
increased from *s. CB4,A-% million in &pril $..% to *s. -,.CB,A65 million in 9arch
$..C 7Table C068. The daily turnover on (SE averaged around *s. C%,$B4 million in this
year. 9ost of the exchanges saw large scale declines in their trading volumes in the year
$..%0.C with nine exchanges vi+., 3alcutta, Ittar ?radesh, &hmedabad, "elhi, ?une,
I3SE, !yderabad, @adodara and 9agadh observing the highest decline. /ive exchanges
viz., (SE, BSE, Bangalore, 9adras and <T3EI were the only ones showing growth
trends in this period. (SE consolidated its position further as the market leader by
contributing about 6A.B> of the total turnover. Since its inception in -44C, (SE has
emerged as the favored exchange among trading members. The consistent increase in
popularity of (SE is clearly evident from &nnexure C06, which presents business growth
of 39 segment of (SE. (SE now reports higher turnover
from its trading terminals in most of the cities than their corresponding regional
exchanges. The comparative picture of turnover of regional stock exchanges and
turnover of (SE terminals at different cities is presented in Table C0A. (ot only in the
national arena, but also in the international markets, (SE has been successful in creating
41
a niche for itself. &ccording to reports of /IB@, in the calendar year $..%, in terms of
trading intensity (SE ranked %rd next only to (&S"&S and (NSE.
ATTN3 TABLE ON NECT PAGE
42
STOCK MARKET TRENDS IN INDIA 43
The sectoral distribution of turnover has undergone significant change over last few
years. Table C0B presents the share of top M5.F companies at (SE, classified according to
different sectors, in turnover and market capitali+ation. The share of manufacturing
companies in trading volume of top M5.F companies, which was nearly more than $%> in
-44B044, witnessed a sharp decline to $..%> $..$ 0.%. /urther, in $..% 0.C, their share
has risen sharply to %A.66>. The share of information technology 7IT8 companies in
trading volume has fallen from AC.A-> in $..$ 0 .% to only %-..C> in $..% 0 .C.
44
The share of top M5F securities in turnover has been on a declining trend since the
past few years from 5$.$> in $...0.- to %-..C> in $..%0.C 7Table C048. Trading in top
M-..F securities also has witnessed a decline from 4A.5> to 4-..%> over the same
period. 9ember0wise distribution of turnover indicates increasing diffusion of trades
among a larger number of trading members over the years. "uring $..%0.C, top M5F
members accounted for only --.6> of turnover, while top M-..F members accounted for
6-.C> of total turnover. Turnover in India seems to be more concentrated in comparison
to that in other comparable markets 7international8 as may be seen from Table C 0-.. Ten
most active index securities accounted for CC.$> of turnover in India and top ten index
securities in terms of e#uity base accounted for %6.5> of market capitali+ation at the end
of "ecember $..%.
45
&t the end of 9arch $..C, (SE has permitted A. members on its 39 segment
the web based access to its trading system. These members in turn have registered
C-%,C5C clients for web based access. &bout $%5 lakh trades for *s. %A4,C5- million
constituting %.C5> of the total trading volume were routed and executed through the
internet. (E&TiXS a product of the (SE.IT helps brokerage firms to conduct internet
trading, which can be accessed easily using standard browsers. It provides real time
46
on0line market information including stock #uotes and order screens, allowing investors
to place orders from their personal computers. The success of internet trading in India,
however, will depend on expansion of internet bandwidth, which is necessary for faster
execution of trades.
K. Mar?et Capta1Gato$
he market capitali+ation for securities available for trading on the e#uity
segment of (SE and BSE witnessed enormous growth over the previous years
7Table C068. The market capitali+ation of (SE and BSE as at end 9arch $..C
amounted to *s. --,$.4,A6. million and *s. -$,.-$,.6B million respectively. & sharp
change in the shares of different sectors in market capitali+ation is observed over the
years 7Table C0B8. Sectors like manufacturing, which used to dominate in terms of
market capitali+ation with more than %5> in the year -44B044, have shown declines in
$..-0.$ and $..$0.%. !owever, they witnessed a turnaround in $..%0.C having
registered %-.-%> share in market capitali+ation of the top 5. companies.
T
L. Prce!
he year $..%0.C proved to be good for all the ma;or indices in the world. The
SD? 3(E (ifty index, which remained subdued for the early part of $..%,
rose sharply from &ugust $..% onwards to reach a peak of $.-C.65 in Ganuary
$..C. The index rose by B-.-C> in $..%0.C as compared to its previous years close
7Table C0--8. Similarly BSE also gave returns to the tune of B%.%B> in the said period.
T
47
<f late, the market participants, analysts and investors have related the developments in
domestic e#uity markets with the (&S"&S. (&S"&S index has come to symboli+e the
new economy or technology stocks. 3hart C0- plots the daily movement in SD? 3(E
(ifty, Sensex and (&S"&S index. "uring most part of the year, the stock prices in
India are synchroni+ed with that in (&S"&S.
E. ;o1at1t6
48
he stock markets witnessed maximum volatility in Ganuary $..C due to the
fear of possible ban on the use of ?articipatory (otes 7?0(otes8, wherein it
was $.-B> and $..5> on (ifty and Sensex, respectively 7Table C0-$8.
!owever, in 9ay $..% lowest volatility was witnessed at ..AC> and ..A$> for SD?
3(E (ifty and Sensex respectively. 3hart C0$ presents the volatility of SD? 3(E (ifty,
Sensex and (&S"&S. The volatility across different sectoral indices varied widely
7Table C 0-%8. /or the month of &pril $..%, while the (ifty volatility was -.%B>, the
volatility of 3(E IT Index was 5.$.>.
T
49
K. Retur$! $ I$8a$ Mar?et
he performance of SD? 3(E (ifty and various other indices over different
periods of last one month to -$ months is presented in Table C0-C. It reveals
that the indices have performed with varying degrees over varying periods. &
common phenomenon observed was that some of the indices provided substantial gains
in the longer period of 6 months and one year, but did not give encouraging returns for
the shorter periods of - month, % months. The investments made in SD? 3(E (ifty
securities in /ebruary $..C did not yield having positive returns, however the
T
50
investments in the same a year back 79arch $..%8 gave out positive returns of B-.-C>.
3(E 9idcap $.. and 3(E IT index proved to follow the same trend as of (ifty. The
comparative performance of five ma;or sectoral indices, viz. SD? 3(E ?etrochemicals
Index, SD? 3(E /inance Index, 3(E /93) Index, SD? 3(E ?harma Index, and
3(E IT Index, with that of SD? 3(E (ifty Index for the year $..%0.C is presented in
3hart C0%. It is observed that during the entire period, 3(E /inance Index, SD? 3(E
?etrochemicals Index and the SD? 3(E ?harma Index out0performed the (ifty. The
3(E IT Index, was the worst performer during the whole year. 3(E /93) Index
though mirrored the movement of (ifty during the first half of the year. !owever, it
under performed the benchmark index M(iftyF during the later half. The monthly closing
prices of these sectoral indices are presented in Table C 0-%.
51
L. E@c(a$0e Tra8e8 &u$8!
he first ET/ in India, the 1(ifty BeES 7(ifty Benchmark Exchange Traded
Scheme8 is based on SD? 3(E (ifty. It was launched in "ecember $..- by
Benchmark 9utual /und. It is bought and sold like any other stock on (SE
and has all characteristics of an index fund. &s on 9arch end $..%, there were five ET/s
launched on (ifty, Gunior (ifty, 3(E Bank Index namely, the (ifty BeES, Gunior (ifty
BeES, Bank BeES, Ji#uid BeES and SI("E* 7SD? 3(E (ifty ITI (otional
"epository *eceipts Scheme8. ?rudential I3I3I launched an ET/ based on BSE Sensex,
namely S?I3E 7Sensex ?rudential I3I3I Exchange Traded /und8. "uring the month of
9arch $..C, 6%A trades involving ..-% million (ifty BeES were transacted. The trading
value was *s. $$.C$ million.
T
M. LDu8t6
any listed securities on stock exchanges are not traded actively. The
percentage of companies traded on BSE was #uite low at %5.4%> as
compared with 4A.A-> on (SE in 9arch $..C 7Table C0-58. <nly
A5.-.> of companies traded on BSE were traded for more than -.. days during $..%0
.C, while that on (SE, it has been 4$.-6> 7Table C0-68. Trading took place for less than
9
52
-.. days in case of $C.4> of companies traded at BSE during the year, and for less than
-. days in case of 5.6> of companies traded.
N. I$!ttuto$a1 Tra$!acto$!
53
hough the volume of trades done by /IIs is not very high as compared to other
market participants, they are the driving force in determination of market
sentiments and price trends. This is so because, they do only delivery0based
trades and they are perceived to be infallible in their assessment of the market. "uring
$..%0.C, the investments made by /IIs were a total turnaround compared to its
performances in the earlier years. The strong risk ad;usted returns of the Indian market
have led /IIs to make more allocations to India. The /IIs registered a net investment of
*s. C5A,6C5 million. The /IIs net investment was highest during the month of <ctober
$..%, when they made net purchases for a peak of *s. 6A,$$B million 7Table C0-A8. The
cumulative net /IIs investment touched ISK $5.A5 billion by end0 9arch $..C. &s on
end 9arch $..C, the total number of /IIs registered with SEBI amounted to 5C. against
5.$ in 9arch $..%.
T
"uring $..%0.C, the 9/s have invested more funds in the debt instruments than
e#uity instruments 7Table C0-B8. In the e#uity market, 9/s were net buyers to the tune
of *s. -%,-5A million during $..%0.C. The months of &pril $..%, Gune $..%, September
$..%, <ctober $..% and /ebruary $..C witnessed the 9/s in a selling spree in the
e#uity, whereas in the debt instruments only /ebruary $..C witnessed the 9/s in selling
mode.
54
O. ADR9GDR Prce!
comparison of the price of &"*)"* of a company with the domestic price
of its share gives an idea about the extent to which domestic price of the
security is at premiumdiscount to the international price. The extent of
divergence between the prices of &"*s)"*s and the domestic prices of the companies
constituting the Instanex Skindia index is presented in Table C0-4. *BI permitted two0
way fungibility for &"*s)"*s, which meant that the investors 7foreign institutional or
domestic8 in any company that has issued &"*s)"*s could freely convert the
&"*s)"*s into underlying domestic shares. They could also reconvert the domestic
shares into &"*s)"*s, depending on the direction of price change in the stock
&
P. Ta?eo#er!
56
n $..%0.C, there were 65 takeovers under open category involving *s. -5,4CB
million as against *s. 6%,B4- million during the preceding year 7Table C0$.8.
!owever, there were -A- takeovers under exempted category involving *s. -C,%5A
million as against *s. $C,$BC million in the previous year.
I
B. Per7or%a$ce o7 Bro?er!
s mentioned earlier, there were 4,%6B trading members at the end of 9arch
$..C, however, the details of their performance are not readily available. &
brief detail with respect to A44 members of (SE is presented in Table C0$-.
It is observed that about 5A> of the members had deployed a capital of less than *s. $.
million at the end of 9arch $..%, while 5> have deployed more than *s. -.. million.
Similarly about 5$> of members had a turnover of less than *s. -.,... million during
$..%0.C, while about 6> had turnover of more than *s. -.,... crore.
&
57
END OF CHAPTER IV
CHAPTER ; TECHNICAL ANAYSIS IN THE STOCK MARKET
58
echnical analysis is simply the study of prices as reflected on price charts.
Technical analysis assumes that current prices should represent all known
information about the markets. ?rices not only reflect intrinsic facts, they also
represent human emotion and the pervasive mass psychology and mood of the moment.
?rices are, in the end, a function of supply and demand. !owever, on a moment to
moment basis, human emotionsTfear, greed, panic, hysteria, elation, etc. also
dramatically effect prices. 9arkets may move based upon peopleFs expectations, not
necessarily facts. & market UtechnicianU attempts to disregard the emotional component
of trading by making his decisions based upon chart formations, assuming that prices
reflect both facts and emotion.
T
A. STOCK CHARTS
Stock charts gained popularity in the late -4th 3entury from the writings of 3harles !.
"ow in the 'all Street Gournal. !is comments, later known as U"ow TheoryU, alleged
that markets move in all kinds of measurable trends and that these trends could be
deciphered and predicted in the price movement seen on all charts.
/I("&9E(T&J &(&JNSIS seeks to determine future stock price by understanding
and measuring the ob;ective UvalueU of an e#uity. The study of stock charts, known as
TE3!(I3&J &(&JNSIS, believes that the past action of the market itself will
determine the future course of prices.
& stock chart is a simple two0axis 7x0y8 plotted graph of price and time. Each individual
e#uity, market and index listed on a public exchange has a chart that illustrates this
movement of price over time. Individual data plots for charts can be made using the
3J<SI() price for each day. The plots are connected together in a single line, creating
the graph. &lso, a combination of the <?E(I(), 3J<SI(), !I)! andor J<' prices
for that market session can be used for the data plots. This second type of data is called a
?*I3E B&*. Individual price bars are then overlaid onto the graph, creating a dense
visual display of stock movement.
59
Stock charts can be created in many different time frames. 9utual fund holders use
monthly charts in which each individual data plot consists of a single month of activity.
"ay traders use - minute and 5 minute stock charts to make #uick buy and sell decisions.
The most common type of stock chart is the daily plot, showing a single complete
market session for each unit.
Stock charts can be drawn in two different ways. &n &*IT!9ETI3 chart has e#ual
vertical distances between each unit of price. & J<)&*IT!9I3 chart is a percentage
growth chart. It has e#ual vertical distances between the same percentages of price
growth. /or example, a price movement from -. to $. is a -..> move. & move from $.
to C. is also a -..> move. /or this reason, the vertical distance from -. to $. and the
vertical distance from $. to C. will be identical on a logarithmic chart.
Stock chart analysis can be applied e#ually to individual stocks and ma;or indices.
&nalysts use their technical research on index charts to decide whether the current
market is a BIJJ 9&*LET or a BE&* 9&*LET. <n individual charts, investors and
traders can learn the same thing about their favorite companies.
B. TRENDS
60
Ise the stock chart to identify the current trend. & trend reflects the average rate of
change in a stockVs price over time. Trends exist in all time frames and all markets. "ay
traders can establish the trend of their stocks to within minutes. Jong term investors
watch trends that persist for many years.
Trends can be classified in three ways: I?, "<'( or *&()EB<I(". In an uptrend,
a stock rallies often with intermediate periods of consolidation or movement against the
trend. In doing so, it draws a series of higher highs and higher lows on the stock chart. In
an uptrend, there will be a ?<SITI@E rate of price change over time.
In a downtrend, a stock declines often with intermediate periods of consolidation or
movement against the trend. In doing so, it draws a series of lower highs and lower lows
on the stock chart. In a downtrend, there will be a (E)&TI@E rate of price change over
time.
*ange bound price swings back and forth for long periods between easily seen upper and
lower limits. There is no apparent direction to the price movement on the stock chart and
there will be JITTJE or (< rate of price change.
Trends tend to persist over time. & stock in an uptrend will continue to rise until some
change in value or conditions occurs. "eclining stocks will continue to fall until some
61
change in value or conditions occurs. 3hart readers try to locate T<?S and B<TT<9S,
which are those points where a rally or a decline ends. Taking a position near a top or a
bottom can be very profitable.
Trends can be measured using T*E("JI(ES. @ery often a straight line can be drawn
I("E* three or more pullbacks from rallies or <@E* pullbacks from declines. 'hen
price bars then return to that trend line, they tend to find SI??<*T or *ESIST&(3E
and bounce off the line in the opposite direction.
& famous #uote about trends advises that UThe trend is your friendU. /or traders and
investors, this wisdom teaches that you will have more success taking stock positions in
the direction of the prevailing trend than against it.

C. ;o1u%e
@olume measures the participation of the crowd. Stock charts display volume through
individual !IST<)*&9S below the price pane. <ften these will show green bars for up
days and red bars for down days. Investors and traders can measure buying and selling
interest by watching how many up or down days in a row occur and how their volume
compares with days in which price moves in the opposite direction.
Stocks that are bought with greater interest than sold are said to be under
&33I9IJ&TI<(. Stocks that are sold with great interest than bought are said to be
62
under "IST*IBITI<(. &ccumulation and distribution often JE&" price movement. In
other words, stocks under accumulation often will rise some time after the buying
begins. &lternatively, stocks under distribution will often fall some time after selling
begins.
It takes volume for a stock to rise but it can fall of its own weight. *allies re#uire the
enthusiastic participation of the crowd. 'hen a rally runs out of new participants, a
stock can easily fall. Investors and traders use indicators such as <( B&J&(3E
@<JI9E to see whether participation is lagging 7behind8 or leading 7ahead8 the price
action.
Stocks trade daily with an average volume that determines their JISII"ITN. Ji#uid
stocks are very easy for traders to buy and sell. Illi#uid stocks re#uire very high
S?*E&"S 7transaction costs8 to buy or sell and often cannot be eliminated #uickly from
a portfolio. Stock chart analysis does not work well on illi#uid stocks.
Breakouts accompanied by volume much higher than the average for that stock are
healthy for the continuation of the price movement in that direction. But after long rallies
or declines, stocks often have a day of very high volume known as a 3JI9&E. "uring
these days, the last of the buyers or sellers take positions. The stock then reverses as
there are no longer enough participants to cause price to move in that direction.

D. Patter$! a$8 I$8cator!
63
!ow can you organi+e the endless stream of stock chart data into a logical format that
doesnVt re#uire rocket science to interpretW 3harts allow investors and traders to look at
past and present price action in order to make reasonable predictions and wise choices. It
is a highly visual medium. This one fact separates it from the colder world of value0
based analysis.
The stock chart activates both left0brain and right0brain functions of logic and creativity.
So itVs no surprise that over the last century two forms of analysis have developed that
focus along these lines of critical examination.
The oldest form of interpreting charts is ?&TTE*( &(&JNSIS. This method gained
popularity through both the writings of 3harles "ow and Technical &nalysis of Stock
Trends, a classic book written on the sub;ect ;ust after 'orld 'ar II. The newer form of
interpretation is I("I3&T<* &(&JNSIS, a math0oriented examination in which the
basic elements of price and volume are run through a series of calculations in order to
predict where price will go next.
?attern analysis gains its power from the tendency of charts to repeat the same bar
formations over and over again. These patterns have been categori+ed over the years as
having a bullish or bearish bias. Some well0known ones include !E&" and
S!<IJ"E*S, T*I&()JES, *E3T&()JES, "<IBJE T<?S, "<IBJE
64
B<TT<9S and /J&)S. &lso, chart landscape features such as )&?S and
T*E("JI(ES are said to have great significance on the future course of price action.
Indicator analysis uses math calculations to measure the relationship of current price to
past price action. &lmost all indicators can be categori+ed as T*E("0/<JJ<'I() or
<S3IJJ&T<*S. ?opular trend0following indicators include 9<@I() &@E*&)ES,
<( B&J&(3E @<JI9E and 9&3". 3ommon oscillators include ST<3!&STI3S,
*SI and *&TE </ 3!&()E. Trend0following indicators react much more slowly than
oscillators. They look deeply into the rear view mirror to locate the future. <scillators
react very #uickly to short0term changes in price, flipping back and forth between
<@E*B<I)!T and <@E*S<J" levels.
Both patterns and indicators measure market psychology. The core of investors and
traders that make up the market each day tend to act with a herd mentality as price rises
and falls. This UcrowdU tends to develop known characteristics that repeat themselves
over and over again. 3hart interpretation using these two important analysis tools
uncovers growing stress within the crowd that should eventually translate into price
change.
E. Mo#$0 A#era0e!
65
The most popular technical indicator for studying stock charts is the 9<@I()
&@E*&)E. This versatile tool has many important uses for investors and traders. Take
the sum of any number of previous 3J<SE prices and then divide it by that same
number. This creates an average price for that stock in that period of time. & moving
average can be displayed by re0computing this result daily and plotting it in the same
graphic pane as the price bars. 9oving averages J&) price. In other words, if price
starts to move sharply upward or downward, it will take some time for the moving
average to Ucatch upU.
?lotting moving averages in stock charts reveals how well current price is behaving as
compared to the past. The power of the moving average line comes from its direct
interaction with the price bars. 3urrent price will always be above or below any moving
average computation. 'hen it is above, conditions are UbullishU. 'hen below,
conditions are UbearishU. &dditionally, moving averages will slope upward or downward
over time. This adds another visual dimension to a stock analysis.
9oving averages define ST<3L T*E("S. They can be computed for any period of
time. Investors and traders find them most helpful when they provide input about the
S!<*T0TE*9, I(TE*9E"I&TE and J<()0TE*9 trends. /or this reason, using
66
multiple moving averages that reflect these characteristics assist important decision
making. 3ommon moving average settings for daily stock charts are: $. days for short0
term, 5. days for intermediate and $.. days for long0term.
<ne of the most common buy or sell signals in all chart analysis is the 9<@I()
&@E*&)E 3*<SS<@E*. These occur when two moving averages representing
different trends criss0cross. /or example, when a short0term average crosses BEJ<' a
long0term one, a SEJJ signal is generated. 3onversely, when a short0term crosses
&B<@E the long0term, a BIN signal is generated.
9oving averages can be Uspeeded upU through the application of further math
calculations. 3ommon averages are known as SI9?JE or S9&. These tend to be very
slow. By giving more weight to the current changes in price rather than those many bars
ago, a faster EE?<(E(TI&J or E9& moving average can be created. 9any
technicians favor the E9& over the S9&. /ortunately all common stock chart
programs, online and offline do the difficult moving average calculations for you and
plot price perfectly.
&. Support a$8 Re!!ta$ce
67
The concept of SI??<*T &(" *ESIST&(3E is essential to understanding and
interpreting stock charts. Gust as a ball bounces when it hits the floor or drops after being
thrown to the ceiling, support and resistance define natural boundaries for rising and
falling prices.
Buyers and sellers are constantly in battle mode. Support defines that level where buyers
are strong enough to keep price from falling further. *esistance defines that level where
sellers are too strong to allow price to rise further. Support and resistance play different
roles in uptrends and downtrends. In an uptrend, support is where a pullback from a rally
should end. In a downtrend, resistance is where a pullback from a decline should end.
Support and resistance are created because price has memory. Those prices where
significant buyers or sellers entered the market in the past will tend to generate a similar
mix of participants when price again returns to that level.
'hen price pushes above resistance, it becomes a new support level. 'hen price falls
below support, that level becomes resistance. 'hen a level of support or resistance is
penetrated, price tends to thrust forward sharply as the crowd notices the B*E&L<IT
and ;umps in to buy or sell. 'hen a level is penetrated but does not attract a crowd of
buyers or sellers, it often falls back below the old support or resistance. This failure is
known as a /&JSE B*E&L<IT.
Support and resistance come in all varieties and strengths. They most often manifest as
hori+ontal price levels. But trend lines at various angles represent support and resistance
as well. The length of time that a support or resistance level exists determines the
strength or weakness of that level. The strength or weakness determines how much
buying or selling interest will be re#uired to break the level. &lso, the greater volume
traded at any level, the stronger that level will be.
Support and resistance exist in all time frames and all markets. Jevels in longer time
frames are stronger than those in shorter time frames.
68
The ideas of 3harles "ow, the first editor of the 'all Street Gournal, form the basis of
technical analysis today. "ow created the Industrial &verage, of top blue chip stocks,
and a second average of top railroad stocks 7now the Transport &verage8. !e believed
that the behavior of the averages reflected the hopes and fears of the entire market. The
behavior patterns that he observed apply to markets throughout the world.
G. DoF T(eor6
I. T(ree Mo#e%e$t!
9arkets fluctuate in more than one time frame at the same time:
(othing is more certain than that the market has three well defined movements which fit
into each other.
The first is the daily variation due to local causes and the balance of buying and
selling at that particular time 7*ipple8.
The secondary movement covers a period ranging from days to weeks, averaging
probably between six to eight weeks 7'ave8.
The third move is the great swing covering anything from months to years,
averaging between 6 to CB months. 7Tide8.
Bull markets are broad upward movements of the market that may last several
years, interrupted by secondary reactions. Bear markets are long declines
69
interrupted by secondary rallies. These movements are referred to as the primary
trend.
Secondary movements normally retrace from one third to two thirds of the
primary trend since the previous secondary movement.
"aily fluctuations are important for short0term trading, but are unimportant in
analysis of broad market movements.
H. DoF T(eor6
I. Pr%ar6 Mo#e%e$t! (a#e T(ree P(a!e!
Jook out for these general conditions in the market.
Bu11 %ar?et!
Bull markets commence with reviving confidence as business conditions
improve.
?rices rise as the market responds to improved earnings
*ampant speculation dominates the market and price advances are based on
hopes and expectations rather than actual results.
Bear %ar?et!
Bear markets start with abandonment of the hopes and expectations that
sustained inflated prices.
?rices decline in response to disappointing earnings.
"istress selling follows as speculators attempt to close out their positions and
securities are sold without regard to their true value.
Ra$0$0 Mar?et!
& secondary reaction may take the form of a MlineF which may endure for several
weeks.
70
?rice fluctuates within a narrow range of about five per cent.
Brea?out! 7ro% a ra$0e ca$ occur $ et(er 8recto$.
&dvances above the upper limit of the line signal accumulation and higher
pricesH
"eclines below the lower limit indicate distribution and lower pricesH
@olume is used to confirm price breakouts.
I. DoF T(eor6
I. Tre$8!
Bu11 Tre$8 0 & bull trend is identified by a series of rallies where each rally exceeds the
highest point of the previous rally. The decline, between rallies, ends above the lowest
point of the previous decline
71
Successive higher highs and higher lows.
The start of an up trend is signaled when price makes a higher low 7trough8, followed by
a rally above the previous high 7peak8:
Start H (0(er LoF I 4rea? a4o#e pre#ou! H0(.
The end is signaled by a lower high 7peak8, followed by a decline below the previous
low 7trough8:
E$8 H 1oFer H0( I 4rea? 4e1oF pre#ou! LoF.
72

'hat if the series of higher !ighs and higher Jows is first broken by a lower JowW
There are two possible interpretations 0 see Jarge 3orrections.
Bear Tre$8! " Each successive rally fails to penetrate the high point of the previous
rally. Each decline terminates at a lower point than the preceding decline.
Succe!!#e 1oFer (0(! a$8 1oFer 1oF!.
73
& bear trend starts at the end of a bull trend: when a rally ends with a lower peak and
then retreats below the previous low. The end of a bear trend is identical to the start of a
bull trend. 'hat if the series of lower !ighs and lower Jows is first broken by a higher
!ighW This is a gray area 0 see Jarge 3orrections.
E. DoF T(eor6
I. Lar0e Correcto$!
& large correction occurs when price falls below the previous low 7during a bull trend
where price rises above the previous high 7in a bear trend8.
74
Some purists argue that a trend ends if the se#uence of higher highs and higher lows is
broken. <thers argue that a bear trend has not started until there is a lower !igh and Jow
nor has a bull trend started until there is a higher Jow and !igh.
/or practical purposes: O$16 accept 1ar0e correcto$! a! tre$8 c(a$0e! $ t(e
pr%ar6 tre$83
& bull trend starts when price rallies above the previous high
& bull trend ends when price declines below the previous low,
& bear trend starts at the end of a bull trend 7and vice versa8.

K. An Introduction to Japanese Candlestic C!artin"
Standard bar charts are commonly used to convey price activity into an easily readable
chart. Isually four elements make up a bar chart, the <pen, !igh, Jow, and 3lose for
the trading sessiontime period. & price bar can represent any time frame the user
wishes, from - minute to - month. The total vertical lengthheight of the bar represents
the entire trading range for the period. The top of the bar represents the highest price of
the period, and the bottom of the bar represents the lowest price of the period. The <pen
is represented by a small dash to the left of the bar, and the 3lose for the session is a
small dash to the right of the bar. Below is a standard bar chart example.
75
Ca$81e!tc? C(art! E@p1a$e8
Nou may be asking yourself, UIf I can already use bar charts to view prices, then why do
I need another type of chartWU
The answer to this #uestion may not seem obvious, but after going through the following
candlestick chart explanations and examples, you will surely see value in the different
perspective candlesticks bring to the table. In my opinion, they are much more visually
appealing, and convey the price information in a #uicker, easier manner.
H!tor6 o7 Ca$81e!tc? C(art!
3andlestick charts are on record as being the oldest type of charts used for price
prediction. They date back to the -A..Vs, when they were used for predicting rice prices.
In fact, during this era in Gapan, 9unehisa !omma become a legendary rice trader and
gained a huge fortune using candlestick analysis. !e is said to have executed over -..
consecutive winning tradesX
The candlesticks themselves and the formations they shape were give colorful names by
the Gapanese traders. "ue in part to the military environment of the Gapanese feudal
system during this era, candlestick formations developed names such as Ucounter attack
linesU and the Uadvancing three soldiersU. Gust as skill, strategy, and psychology are
important in battle, so too are they important elements when in the midst of trading
battle.
3andlestick charts are much more visually appealing than a standard two0dimensional
bar chart. &s in a standard bar chart, there are four elements necessary to construct a
candlestick chart, the <?E(, !I)!, J<' and 3J<SI() price for a given time period.
Below are examples of candlesticks and a definition for each candlestick component:

76

The body of the candlestick is called the real body, and represents the
range between the open and closing prices.
& black or filled0in body represents that the close during that time period
was lower than the open, 7normally considered bearish8 and when the
body is open or white, that means the close was higher than the open
7normally bullish8.
The thin vertical line above andor below the real body is called the
upper/lower shadow, representing the highlow price extremes for the
period.
77

Bar Co%pare8 to Ca$81e!tc? C(art!
Below is an example of the same price data conveyed in a standard bar chart and a
candlestick chartW (otice how the candlestick chart appears %0dimensional, as price data
almost ;umps out at you.
7 %a 8
7%b8
The long, dark, filled0in real bodies represent a weak 7bearish8 close 7 %a 8, while a
long open, light0colored real body represents a strong 7bullish8 close 7 %b 8. It is
important to note that Gapanese candlestick analysts traditionally view the open and
closing prices as the most critical of the day. &t a glance, notice how much easier it is
with candlesticks to determine if the closing price was higher or lower than the opening
price.
78
Co%%o$ Ca$81e!tc? Ter%$o1o06
The following is a list of some individual candlestick terms. It is important to reali+e that
many formations occur within the context of prior candlesticks. 'hat follows is merely
a definition of terms, not formations.
The Black 3andlestick 00 when the close is lower than the open.
T(e '(te Ca$81e!tc? 00 when the close is higher than the open.
T(e S(a#e$ Hea8 00 a candlestick with no upper shadow.
79
T(e S(a#e$ Botto% 00 a candlestick with no lower shadow.
Sp$$$0 Top! -- candlesticks with small real bodies, and when
appearing within a sideways choppy market, they represent e#uilibrium
between the bulls and the bears. They can be either white or black.
80
DoJ L$e! 00 have no real body, but instead have a hori+ontal line. This
represents when the <pen and 3lose are the same or very close. The
length of the shadow can vary.
Ca$81e!tc? Re#er!a1 Patter$!
Gust as many traders look to bar charts for double tops and bottoms, head0and0shoulders,
and technical indicators for reversal signals, so too can candlestick formations be looked
upon for the same purpose. & reversal does not always mean that the current
uptrenddowntrend will reverse direction, but merely that the current direction may end.
The market may then decide to drift sideways. 3andlestick reversal patterns must be
viewed within the context of prior activity to be effective. In fact, identical candlesticks
may have different meanings depending on where they occur within the context of prior
trends and formations.
Ha%%er 00 a candlestick with a long lower shadow and small real
body. The shadow should be at least twice the length of the real body,
and there should be no or very little upper shadow. The body may be
either black or white, but the key is that this candlestick must occur
within the context of a downtrend to be considered a hammer. The
market may be UhammeringU out a bottom.
81
Ha$0$0 Ma$ 00 identical in appearance to the hammer, but appears
within the context of an uptrend.
E$0u17$0 Patter$! 00 Bullish 00 when a white, real body totally
covers, UengulfsU the prior dayVs real body. The market should be in a
definable trend, not chopping around sideways. The shadows of the prior
candlestick do not need to be engulfed.
82
Bear!( 00 when a black, real body totally covers, UengulfsU the prior
dayVs real body. The market should be in a definable trend, not chopping
around sideways. The shadows of the prior candlestick do not need to be
engulfed.
Dar?"C1ou8 Co#er /4ear!(2 00 a top reversal formation where the first
day of the pattern consists of a strong white, real body. The second
dayVs price opens above the top of the upper shadow of the prior
candlestick, but the close is at or near the low of the day, and well into the
prior white, real body.
83
Perc$0 Patter$ /4u11!(2 00 opposite of the dark-cloud cover. <ccurs
within a downtrend. The first candlestick having a black, real body, and
the second has a long, white, real body. The white day opens sharply
lower, under the low of the prior black day. Then, prices close above the
5.> point of the prior dayVs black real body.
Star!
These candlestick formations consist of a small real body that gaps away from the real
body preceding it. The real body of the star should not overlap the prior real body. The
color of the star is not too important, and they can occur at either tops or bottoms. Stars
are the e#uivalent of gaps on standard bar charts.
84

Stars make up part of four separate reversal patterns:
9orning Star
Evening Star
"o;i Star
Shooting Star 7Inverted !ammer8

Mor$$0 Star 00 this is a bullish bottom reversal pattern. The formation is
comprised of % candlesticks. The first candlestick is a tall black real body
followed by the second, a small real body, which gaps 7opens8, lower 7a star
85
pattern8. The third candlestick is a white real body that moves well into the first
periodVs black real body. This is similar to an island pattern on standard bar
charts.
E
#
e
$$0 Star 00 a bearish top reversal pattern and counterpart to the 9orning Star.
Three candlesticks compose the evening star, the first being long and white. The
second forms a star, followed by the third, which has a black real body that
moves sharply into the first white candlestick.
DoJ Star! 00 'hen a "o;i gaps above a real body in an uptrend, or gaps under a
real body in a falling market, that particular "o;i is called a o!i star. Two
popular "o;i stars are the evenin" star and the mornin" star.
86
E#e$$0 DoJ Star 00 a "o;i star in an uptrend followed by a long, black real
body that closed well into the prior white real body. If the candlestick after the
"o;i star is white and gapped higher, the bearishness of the "o;i is invalidated.
Mor$$0 DoJ Star 00 a "o;i star in a downtrend followed by a long, white real
body that closes well into the prior black real body. If the candlestick after the
"o;i star is black and gapped lower, the bullishness of the "o;i is invalidated.
87
S(oot$0 Star 00 a small real body near the lower end of the trading range, with
a long upper shadow. The color of the body is not critical. (ot usually considered
a ma;or reversal sign, only a warning.
I$#erte8 Ha%%er00 not really a star, but does look like a shooting star. 'hen
occurring within a downtrend, may be a turning signal. Body color is not critical.
88
END O& CHAPTER ;
CHAPTER VI # $ECTOR # %I$E ANA&'$I$
89
A. Sector! a$8 !toc?! u!e8 7or t(e !tu86
The following five sectors were considered for the purpose of study during the course of
our pro;ect.
Telecom
Steel
3ement
?harma
Software
The following stocks and their trends in the last one year 7$..C8 were studied in the
course of the pro;ect.
Bharti Televentures
S&IJ
&33
'ockhardt
*eliance
B. A$a16!! o7 t(e !ector a$8 t(e re!pect#e !toc?! $ t(e 6ear ,<<=
Te1eco% !ector
I$tro8ucto$
$..C has been a momentous year for the Indian telecom sector. Explosive growth rate in
the mobile telephony segment was almost counterbalanced by rapidly falling
90
profitability due to regulatory pressures and pressure on tariffs. Increasing consolidation
activity was also prominent throughout the year. The growth in the industry was clearly
reflected in the way ma;or telecom players performed on the stock markets. &gainst the
Sensex gains of -C>, the telecom index grew by an almost double $A> during $..C.
Co%par!o$ 4etFee$ ,<<> 5 ,<<=
The most important event of the year for the domestic telecom industry was the
introduction of unified licensing regime 7IJ*8. The main aim of this regime was to
simply the licensing procedure and granting a unified license that enables services
providers to provide all kinds of telecom services covering various geographical areas
using any technology. &nother big event in relation to the sector was the raising of /"I
limits from C4> to AC>.
The strong growth witnessed in the cellular industry in $..C was a result of combination
of the following key factors Q
-. "eclining tariffs due to intensifying competition amongst existing players,
$. &ggressive pricing strategy adopted by service providers, and
%. Jowering of duties on handsets and e#uipments.
Sector out per7or%er3 B(art Te1e
91
The growth in the industry was clearly reflected in the way ma;or telecom players
performed on the stock markets. &gainst the Sensex gains of -C>, the telecom index
grew by an almost double $A> during $..C. The table below shows that Bharti Tele led
the pack with a NoN gain of 44>. Strong performance of the stock, especially during the
second0half of the year, mirrored the robust financial performance of the company. This
growth was aided by a continued strong addition to the subscriber base. &t the end of
September $..C, Bharti had a base of B.Am mobile subscribers, which was $.> of the
Indian cellular 7)S9,3"9&8 market. This rapid addition to the base more than
compensated for the pressure on &*?Is 7average revenue per user8 as the company
improved upon its operating margins and profitability.
Te1eco%3 Ke6 0a$er! $ ,<<=
,."Dec"<> ,:"Dec"<= K
C(a$0e
B!&*TI TEJE -.6 $-$ 44..>
@S(J -55 $%C 5..C>
T&T& TESE*@
79&!8
$% %C CA.$>
9T(J -%5 -5A -6.B>
ITI JT" $5 $B -%.->
T(e 1a00ar83 H&CL
&part from the gainers as mentioned above, there were ;ust a couple of losers from the
telecom sector in $..C Q !/3J 7-A>8 and Lrone 3ommunications 7$->8.
E@pectato$ $ ,<<-
In $..5, leading players are expected to make large0scale investments in technology and
infrastructure 7network expansion8. This would be in line with their initiatives of tapping
a wider customer base. & hike in the /"I limit has also increased the attractiveness of
92
the sector for foreign telecom ma;ors and conse#uently, there could be a large flow of
capital into the sector. This will go a long way in improving the growth prospects of this
sector. !owever, while the overall sector may paint a rosy picture, the story may be
drastically different for individual players as they continue to grapple with falling
&*?Is, regulatory pressures and defaulting customers. The ride for the telecom players
may continue to be topsy0turvy in $..5. &lso, since valuations of leading players seem
stretched from the medium term perspective, stock prices might witness some volatility.
B(art Te1e#e$ture!
Per7or%a$ce Su%%ar6
IndiaFs leading cellular services provider, Bharti Tele, has announced strong results for
the #uarter and nine0month period ending "ecember $..C, reporting almost doubling of
net profits on a NoN basis. <perating margins have also improved for both the periods.
Bharti has crossed the -. m customer mark in this #uarter, cornering a share of over $6>
of all0India )S9 mobile subscriber base.
Co$!o18ate8 7$a$ca1 per7or%a$ce /I&R Sta$8ar8!23 A !$ap!(otL
R! % >B&Y<
=
>B&Y<
-
C(a$0e +%&Y<
=
+%&Y<
-
C(a$0e
Sales -$,6BA $-,5%. 64.A> %C,C4$ 5A,-AC 65.B>
Expenditure A,454 -%,BB6 AC.5> $%,--. %6,5C. 5B.->
<perating profit 7EB"IT8 C,A$B A,6CC 6-.A> --,%B$ $.,6%% B-.%>
<perating profit margin 7>8 %A.%> %5.5> %%..> %6.->
<ther income A4 -%C 6B.B> -.5 $.C 4%.C>
93
Interest A$4 -4- 0A%.B> $,.6A -,%B4 0%$.B>
"epreciation $,$C. %,.%- %5.%> 6,%%$ A,B$- $%.5>
?rofit before tax -,B%B C,555 -CA.4> %,.BA --,6$A $A6.6>
9iscellaneous income
7expenditure8
%.. 7-.8 0-.%.C> %.. 7C68 0--5.$>
9inority interest 6 5- B.-.B> -. 5$ C.%.B>
Tax $-4 A6B $5..%> $$. -,5.5 5BC..>
?rofit after tax7loss8 -,4-% %,A$6 4C.B> %,-5A -.,.$5 $-A.5>
(et profit margin 7>8 -5.-> -A.%> 4.$> -A.5>
(o. of shares -,B5%.. -,B5%.. -,B5%.. -,B5%..
D1ute8 Ear$$0! per !(areM
/R!2
C.- B.. $.% A.$
?E ratio 7x8 $4.-
7Y annuali+ed8
Co%pa$6A! Pro71e
Bharti Televentures is one of the largest telecom service providers in the country. It is
the largest mobile service provider in the country with an over $6> market share 7nearly
4.B m customers8 in the all0India )S9 mobile subscriber base in the country. The
company also provides fixed line and long distance telephony services to its customers.
%S/N.5 saw the company cross the -. m customer mark. Bharti also provides other
allied telecom services like voice and data services and integrated services to corporates.
It is one of the fastest growing companies in the Indian telecom sector.
Per7or%a$ce $ >B&Y<-
Mo41e !er#ce! 1ea8 top1$e 0roFt(
BhartiFs mobile services segment 76$> of consolidated revenues8 has led the growth in
topline in this #uarter with a NoN growth of A%>. This has mainly been a result of a
94
strong A4> NoN growth in the subscriber base. BhartiFs all0India )S9 subscriber base
stands at 4.B m at the end of "ecember $..C, which is over $6> of the all0India base.
'hatFs more, the company has cornered around %.> of the net additions to the )S9
base in the country in %S/N.5. 3ombining the mobile base with the broadband and
telephone base, Bharti has crossed the -. m subscriber base, which seems to have
benefited the company in form of utili+ing its pan0India network and thus achieving
economies of scale. &verage revenue per user 7&*?I8 for the companyFs mobile
services has declined by 6> NoN. But this has been more than compensated by a -5>
NoN growth in average minutes per user. Jower tariffs, attractive offers and a growing
usage of mobile services have led to this growth in the same.
<n the broadband and telephone front, BhartiFs subscriber base has grown by C-> NoN.
&*?I for this segment has declined by $> NoN.
Se0%e$t"F!e per7or%a$ceL
>B&Y<
=
K o7
tota1
>B&Y<
-
K o7
tota1
C(a$0e
Mo41e
*evenue B,5B- 6..B> -C,B$6 6-.6> A$.B>
?BIT %,-6C 66.A> C,B%6 6-.5> 5$.B>
?BIT margin %6.4> %$.6>
Broa84a$8 5 Te1ep(o$e
*evenue $,.5B -C.6> $,4C$ -$.$> C$.4>
?BIT %4B B.C> BC6 -..B> --$.4>
?BIT margin -4.%> $B.B>
Lo$0 D!ta$ce
*evenue $,A%% -4.C> C,4.A $..C> A4.5>
?BIT BB5 -B.6> -,C4A -4..> 64.%>
?BIT margin %$.C> %..5>
E$terpr!e
*evenue A%- 5.$> -,C.A 5.B> 4$.5>
95
?BIT %.. 6.%> 6B- B.A> -$A.$>
?BIT margin C-..> CB.C>
Tota1
*evenue -C,-.% $C,.B- A..B>
?BIT C,AC6 A,B6- 65.6>
?BIT margin %%.A> %$.6>
Y Excluding inter0segment ad;ustments
H0(er $terco$$ect c(ar0e! 8e$t %ar0$!
"espite the strong growth in the topline, Bharti has reported a -B. basis points
narrowing of its operating margins for %S/N.5. This has been mainly a result of a -A.
basis points increase in access and interconnection charges. <n the contrary, expenses
under other ma;or heads like employee costs and license fee have declined in the #uarter.
'ith the revised &"3 7access deficit charge8 guidelines, which are expected to reduce
burden on mobile services providers by reducing their payment to BS(J and 9T(J, we
expect the pressure on account of interconnect charges is likely to decline for Bharti
going forward.
LoFer $tere!t out0o a8! $et pro7t!
"espite a contraction in operating margins, a higher other income and lower interest
charges have helped net profits growth outpace the growth in topline. Even a significant
growth in tax outgo has failed to restrict the superior net profit growth.
E@pectato$
&t the current price of *s $-., the stock is trading at a price to earnings multiple of $4.-
times annuali+ed 4m/N.5 earnings. Bharti has continued its dominance on the Indian
)S9 mobile market as has been clearly stated above. 'ith a presence across $- of the
$% circles in the country, including the recent additions of GDL, 'est Bengal, <rrisa,
Bihar and Gharkhand, Bharti is expected to reap scale advantages going forward.
)rowing competition on the tariff front has failed to cast pressure on the companyFs
96
performance as it has been able to reach out to a wide subscriber base through its mobile
and other value add services.
BHARTI TELEVENTURES
Li ve BSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
225.45
Open (Rs)
225.15
High (Rs)
229.90
Low
(Rs)
221.00
%
Change
1.03
Vo!"e
4#4$502
Va!e (Rs)
104$225$904
52%
&ee'
H(L
240.)0
(
115.00
Li ve NSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
223.)5
Open (Rs)
230.00
High (Rs)
230.00
Low
(Rs)
221.00
%
Change
0.13
Vo!"e
2$105$95*
Va!e (Rs)
4)2$04#$304
52%
&ee'
H(L
250.00
(
114.00
Val uat i on
+P, (Rs)-
).05
P(+ Ra.io (/)
31.99
0ar'e. Cap (Rs
")
41)$*42.2)
P(1V (/)
9.*)
-2raiing 12 "on.hs earnings 3 1,+ ,ense/ 3 ,4P
97
Stee1
I$tro8ucto$
It was yet another year of gains for investors in the stock markets with the benchmark
index Q Sensex Q having notched gains of about -C> during $..C. Similar to last year,
practically all the sectors 7barring /93) this time8 ended the year with significant
gains, as reflected by their respective indices. The metals index 7steel D aluminum8 has
also ended the year in the positive by registering gains of about $A> 7calculated on a
simple average basis of the stocks in the tables below, as the BSE 9etals index was
launched only in $!3N.C8. 'e take a look at what led the continued optimism amongst
investors towards the sector after the spectacular performance in $..C and what is in
store for $..5.
&s mentioned above, the metals index has risen by about $A> during the year. !owever,
if we consider the steel and aluminum sectors in isolation, the steel index has registered
an impressive growth of about C.> while the aluminum sector has closed the year on a
negative note with about $> fall, conse#uently affecting the overall performance of the
metals index.
,<<= #!. ,<<>
'hile 3hina continued to be the dominant force even in $..C, driving metal prices
through the roof, there were significant apprehensions during the first half of $..C with
respect to the 3hinese economy slowing down. It must be noted that 3hinese authorities
have adopted concerted efforts to reign in their galloping economy so as to prevent a
hard landing in the event of a slowdown. !owever, their efforts have not yielded much
result as yet, which has led to the extension of the steel cycle and further strengthening
the aluminum cycle.
Stee1 " The prolonged steel cycle, contrary to our expectations, continued to immensely
benefit steel sector companies in terms of higher reali+ations 0 average steel prices
surged approximately %.> NoN. 3ontinued high levels of capacity utili+ation on the
98
back of strong domestic and international 7led by 3hina8 demand helped steel companies
register strong bottom0line growth during the year. &part from the financial
performance, the sector continued to hog the limelight all through $..C.
The primary reason for the steel sector to hit the headlines time and again in $..C
revolved around rising steel prices. 'hile steel manufacturers cited helplessness in the
face of surging raw material prices like that of coke, iron ore and melting scrap, which
forced them to pass on the same to consumers, there was significant opposition by steel
user industries including auto and construction citing significant pressure on their
margins.
/urther, with India passing through an inflationary phase 7more than B> in &ugust
$..C8, the sector came under government scrutiny time and again, with a view to control
the spiraling steel prices. This included measures like suspending the "E?B scheme so
as to discourage exports to increase domestic availability, forcing players to withhold
price hikes 7during election months8 and announcing custom duty cuts on various forms
of iron and steel products to repel steel companiesF intentions of hiking prices.
Stee13 T(e out per7or%er!
Co%pa$6 Prce o$ Dec ,.) ,<<>
/R!2
Prce o$ Dec ,:) ,<<=
/R!2
K
c(a$0e
BSE"SENSEC -).++ .)-*> *=.>K
SES& )<& 54$ -,..6 64.B>
GI("&J STEEJ D
?<'E*
55. BBA 6-.C>
ESS&* STEEJ $6 %4 C4.C>
IS?&T I("IST*IES -6 $- %%.B>
TIS3< $B% %AC %$.%>
S&IJ 5$ 6- -A.$>
GI("&J I*<( D STEEJ $BC %$A -5.->
99
E@pectato$ $ ,<<-
'e continue to maintain our positive stance towards the aluminum sector for $..5. This
is on the back of a global economic recovery and strong domestic economic growth. The
aluminum sector will benefit from impressive growth in transport and construction
sectors. The global recovery in aluminum demand, led by ma;or economies like the IS,
Europe and 3hina, is intact. &luminum prices therefore, are unlikely to weaken much in
the medium0term. /urther, the added advantage for !indalco would be the improvement
in performance of its copper business in wake of higher T3*3 margins.
&s far as the steel sector is concerned, we must admit that the steel cycle has extended
beyond our expectation as 3hina continues to register strong growth rates despite efforts
by its authorities to cool down the economy. !owever, we continue to remain
apprehensive on the steel sector for the medium0term owing to various reasons. 'e
believe that the steel cycle has peaked and the various domestic and global capacity
expansion plans that are taking shape would put pressure on steel prices. Indian steel
ma;ors have already announced aggressive capacity expansion plans in India. This
means that any shortfall in the demandimports from 3hina will lead to overcapacity in
the domestic market. It must be noted that in the first -. months of $..C, 3hinese steel
imports have fallen by -B>. &t the current ;uncture, the risk0reward ratio in the sector is
against the investor.
SAIL
Per7or%a$ce !u%%ar6
?ublic sector steel behemoth, S&IJ, announced its %S/N.5 results today, which were
largely in line with our expectations. The companyFs bottom0line has more than doubled
on the back of strong topline growth. *iding high on strong reali+ations of the current
prolonged strength in the steel cycle, S&IJFs operating margins have continued to
leapfrog.
100
/R! %2 >B&Y<
=
>B&Y<
-
C(a$0e +%&Y<
=
+%&Y<
-
C(a$0e
(et Sales 5B,4.6 AA,64- %-.4> -5$,5%A -4A,CC- $4.C>
Expenditure C6,C5B C6,6.% ..%> -$$,..% -$4,$.. 5.4>
<perating ?rofit 7EB"IT&8 -$,CCB %-,.BB -C4.A> %.,5%C 6B,$C- -$%.5>
EBIT"& margin 7>8 $-.-> C...> $...> %C.6>
<ther income $-$ 6C$ $.%.$> 5%. $,.56 $BB.->
Interest $,-.4 -,A56 0-6.B> A,-C- C,CA6 0%A.%>
"epreciation $,BB5 $,B6B 0..6> B,CA4 B,C%- 0..6>
?rofit before tax A,666 $A,-.6 $5%.6> -5,CCC 5A,%4- $A-.6>
Tax $B6 --,46C C.AB.B> C66 -6,..- %%%C.C>
?rofit after Tax7Joss8 A,%B. -5,-C$ -.5.$> -C,4AB C-,%4. -A6.%>
(et profit margin 7>8 -$.5> -4.5> 4.B> $-..>
(o. of Shares 7m8 C,-%. C,-%. C,-%. C,-%.
"iluted earnings per shareY A.- -C.A C.B -%.C
?rice to earnings ratio 7x8 C.. C.C
7Y annuali+ed8
Co%pa$6 pro71e
Steel &uthority of India Jtd. 7S&IJ8, the domestic public sector steel behemoth, is
IndiaFs largest steel producer and is the worldFs -5th largest. The company commands
almost -%rd of the domestic market share with its -% 9T?& capacity. It operates C
integrated steel plants and $ specialty steel plants. &fter bleeding at the net profit level
during the period /N44 to /N.% owing to an unfavorable steel cycle, the company
turned around in /N.C and has continued its commendable performance into 4m/N.5.
/urther, going forward, the company has embarked on a massive expansion plan 7split
into two phases8, which will take its steel production capacity to $. 9T?& by /N-$.
Rea!o$! 7or 0oo8 per7or%a$ce $ >B&Y<-
101
Not Ju!t !tro$0 rea1Gato$!3 'hile strong reali+ations continue to be the sole driver
for the companyFs topline growth 7up %$> NoN8, its efforts to improve the product mix
have also started to yield results. It must be noted that average steel prices in the
domestic markets during the #uarter were higher by %C> compared to the corresponding
#uarter last year. /urther, higher contribution from better margin product sales i.e. value0
added products, such as heavy structural, rails, plates, wheels D axles and bars D rounds
have also seemingly aided the topline growth. 'hile the company does not provide
volume sales numbers, during the #uarter its saleable steel production registered a rise of
5> over the corresponding period last year.
I%pro#$0 e77ce$ce! a8 pro7ta41t63 S&IJFs operating margins have nearly
doubled in the last one0year from $-> in %S/N.C to the current C.> 7%S/N.58. 'hile
strong steel prices deserve a significant credit for this as steel companies en;oy a high
operating leverage, the companyFs efforts at improving its operating efficiencies have
also aided this margin improvement. &s per the company, there was consistent
improvement in production through energy efficient continuous casting route, increase in
share of value added products, improvement in techno0economic factors like reduction
in coke consumption rate, all of which have collectively contributed to the overall
profitability.
Botto%"1$e 8ou41e!3 ?ost the -5.> NoN rise in operating profits, an over $..> rise
in other income and a -A> fall in interest costs 7on the back of continuous debt
reduction and debt replacement exercise8H the profits registered a $5%> rise at the ?BT
level. !owever, the bottom0line growth was curtailed to -.5> 7though still splendid8
102
owing to a massive rise in tax provisioning. !owever, in what could be termed as a
ma;or landmark in the overall turnaround process of S&IJ, the board for the first time
since -44A04B has announced an interim dividend of -5> on paid0up.
SAIL
Li ve BSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
#5.*5
Open (Rs)
##.00
High (Rs)
##.40
Low
(Rs)
#4.#5
%
Change
2.09
Vo!"e
5$441$25#
Va!e (Rs)
35#$*#0$)04
52%
&ee'
H(L
#).#5
(
20.00
Li ve NSE Quot es
Mar 11,
2005
( Cl ose)
103
So7tFare
I$tro8ucto$
Between the two under0performers of the calendar year $..% in relation to the
benchmark index i.e. the Sensex, the software sector was a surprising one besides
/93). /orward to the calendar year $..C, the 3(E IT index has outperformed the
(ifty /ifty. 'e take a closer look at the events that shaped up for the software sector in
calendar year that passed by, including the reasons for the out performance, and what
lies aheadW
,<<= #!. ,<<>
The year $..C marked the continuity in prospects for the Indian software sector with
billing rates stabili+ing 7at least for Tier0- companies8 and volume expanding at Mfaster
than earlierF pace. !owever, the year also led the management of Indian software
companies chew on risks on the outsourcing front in wake of the IS presidential
elections held in (ovember. 'hile the return of 9r. Bush Gunior brought some respite
for these companies as the year drew to a close, it was not before a lot of apprehensions
were raised whether the backlash would affect Indian software companies.
These apprehensions were, however, laid to rest by managements of most of leading
software players as they reported their first #uarter results for the fiscal $..C0.5. 'hile
we did not deny that the backlash against outsourcing had seeds of much larger
resistance throughout the globe, we believed that, in the long0term, economic senses
104
would prevail as global corporations, in their aim of becoming globally more
competitive, would outsource their non0core operations to low0cost countries that
provide high0#uality services 7India, for example8. This belief was vindicated as most of
the leading players from the Indian software sector came out with improved forecasts for
the future. The rest is, as they say, historyX
$..C also saw the listing of T3S, &siaFs largest software services exporter onto the
Indian bourses. The issue received a wide response and the stock was listed at the upper
end of the issue price. &nother event to have marked $..C was the crossing of ISK - bn
revenue mark by two Indian tech ma;ors Q Infosys and 'ipro. 'hile si+e of these three
Indian software players are still miniscule as compared to global technology ma;ors, the
crossover of the ISK - bn revenue mark definitely marks their emergence into the global
technology domain where balance sheet si+e plays a vital role in garnering large0scale
contracts and growing businesses rapidly.
Out per7or%er3 I$7o!6!
& look at the tables of key gainers below indicates that this year has belonged to the
leading players in the industry, be it from the end0to0end segment 7Infosys and 'ipro8 or
from the focused and niche categories 7!exaware and Lale 3onsultants8. )ains,
specifically, in stocks of large players like Infosys and 'ipro were due to belief that
these would be the biggest beneficiaries of the increased outsourcing momentum. These
players are consistently building up their employee bases, investing consistently in
building up infrastructure 7development centres, marketing and distribution network8,
and this is all in the anticipation that they would get enough work to ;ustify their
investments. !owever, we believe that if that fails to fructify, or that if these companies
fail to garner ade#uate business in line with their expectations, times might come out to
be tough.
So7tFare3 Ke6 0a$er! $ ,<<=
,."Dec"<> ,:"Dec"<= K
105
C(a$0e
I(/<SNS -,%CB $,.55 5$.5>
!EE&'&*E TE3! C.A 54B CA..>
'I?*< 5A- A5% %-.4>
L&JE
3<(SIJT&(TS
54 A5 $A.->
*&93< SNSTE9S %66 C6$ $6.%>
T(e 1a00ar83 SSI
3ompanies that have had a poor track record and that were named in the stock markets
scam of $..., lost out considerably in $..C. This is a good sign considering the
historical performance when such stocks rallied along with the better players from the
sector. &s a matter of fact, the ma;or loser in the calendar year $..% was Silverline
7down A->8 followed by ?entasoft 7down 6.>8.
So7tFare3 Ke6 1o!er! $ ,<<=
,."Dec"<> ,:"Dec"<= K
C(a$0e
SSI JT" -4$ CC 0AA.->
?E(T&S</T TE3! B % 06-.$>
@ISI&JS</T $5B -$B 05..C>
"SS S</T'&*E -A 4 0CB.%>
(IIT $66 -AB 0%%.$>
E@pectato$ $ ,<<-
106
'hile software has been considered a relatively insulated sector from geo0political
MupheavalsF in the domestic and global arena, the degree of insulation varies across
companies. 'e believe that continuing from what has been witnessed off late in $..C,
demand for technology solution from global clients is likely to be concentrated among a
few players. These could be any of those who operate across the value chain or who are
focused on specific domain7s8. This is because the demand for technology is likely to be
more guided by the M*eturn on InvestmentF factor, i.e., how much of cost saving or
return on investment can be obtained by clients from their IT spending. 9oreover, taking
cue from the changes that increasing global competition is bringing, many Indian
software companies are moving from competing ;ust on the cost front to improving their
domain competencies 7like establishing greater presence in high0technology telecom and
financial services verticals8 to compete with global ma;ors in their territories. Some, like
Infosys and 'ipro, have succeeded to an extent in this endeavors. !owever, for other
Indian companies to make a mark on the global scale, it would re#uire a !erculean
effort. They cannot rely on the cost arbitrage advantage for long. &nd if they do so,
investors, better keep a watch. <verall, while $..5 might bring in greater challenges for
Indian software companies, these challenges are not likely to be adrift of the conse#uent
opportunities.
MASTEK
Li ve BSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
Open (Rs)
3*).*0
High (Rs)
394.)0
Low
(Rs)
107
3*1.)0 3*0.00
%
Change
%1.22
Vo!"e
*2$252
Va!e (Rs)
31$)#2$100
52%
&ee'
H(L
40*.40
(
1*9.00
Li ve NSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
3*2.05
Open (Rs)
3*9.90
High (Rs)
394.00
Low
(Rs)
3*1.00
%
Change
%1.04
Vo!"e
393$49*
Va!e (Rs)
152$130$000
52%
&ee'
H(L
40).25
(
190.00
Val uat i on
+P, (Rs)-
25.#5
P(+ Ra.io (/)
14.**
0ar'e. Cap (Rs
")
5$29*.00
P(1V (/)
4.13
P(ar%a
I$tro8ucto$
The year $..C was another MspecialF year for the stock market participants, as the
markets see0sawed towards their all time high levels. 'hile almost all the sectors
participated in the bull0run, ?harma stocks were among the leaders, again outperforming
the broader indices after the strong performance in $..%. &gainst -C> gains for the
Sensex, the ?harma index gained $.> during the year.
108
,<<= #!. ,<<>
The year started well for the industry with robust growth witnessed during the first
#uarter. & ma;or growth driver for the industry once again was new products
introduction as companies tried their hands out on various kinds of products in order to
capture largest market share before the new patent regime comes into picture.
The growth in the domestic market was sluggish while revenues from international
markets grew at a rapid pace for Indian companies. &ccording to the statistics of
9inistry of 3hemicals and /ertili+ers, export revenues from the pharmaceutical sector
are likely to grow at a 3&)* of %.> over the next three years 7including /N.58. The
year saw smaller companies like 9atrix labs and "iviFs Jabs made their way further into
exports markets.
Sector out per7or%er3 A#e$t!
9(3 pharma companies were the biggest gainers during $..C with &ventis emerging
the leader. There were two reasons for this out0performance by &ventis. 'hile the
performance of the company was very good on profitability front, the markets have also
taken a re0look at the valuations. Somewhat similar was the case with other ma;or 9(3
pharma companies like )laxo and (ovartis. 'hile (ovartis saw a rise in its stock price
after the announcement by the company that it will try to reach out into a larger part of
India. The company has plans to introduce new drugs once the product patent comes into
force.
109
,."Dec"<> ,:"Dec"<= K
C(a$0e
&ventis 6B$ -,%A. -...4>
(icholas ?iramal -66 $4$ A6.C>
(ovartis C%$ 6B$ 5B.->
&bbott C45 A%6 CB.A>
'ockhardt $54 %56 %A.6>
&part from the 9(3 pharma companies, (icholas ?iramal was amongst the ma;or
gainers in the sector. Two important events that marked the year for (icholas ?iramal
were the contract manufacturing business picking pace, as well the investment in *D".
The company started a new *D" center with a capital expenditure of about *s - bn
making it one of the biggest *D" center in private sector. <n the contract
manufacturing side, the company was able to enter into three agreements for custom
manufacturing of different products. The total si+e of the three deals is about ISK 5. m
which is e#ual to about $.> of the companyFs current revenue.
T(e La00ar83 Dr Re886A!
,."Dec"<> ,:"Dec"<= K
C(a$0e
"r *eddyVs -,C$% B55 0%4.4>
Biocon CBC C4A $.6>
*anbaxy -,.44 -,$C- -%..>
3ipla $5A %.B -4.5>
?fi+er 55A 64B $5.%>
)laxo 545 AA6 %..C>
"espite the strong performance of the overall market, including stocks from the pharma
sector, leading Indian player, "r. *eddyFs witnessed a decline in $..C. The year started
on a bad note for the company as a IS federal court reversed the lower court decision by
its verdict saying that the companyFs generic version M&molodipine 9aleateF will
110
infringe upon the patent of ?fi+erFs M(orvascF. To add on to this, in the first #uarter of
$..C, the company also reported operating losses. The dismal performance continued for
the rest of the year. !igher sales and distribution and *D" expanses led to the declining
margins for the company.
In another important event from the sector, IndiaFs largest biotech company, Biocon,
came up with its initial public offering. The biggest event of the year, however, which
was keenly awaited both by the industry as well as the markets, was the introduction of
the new patent regime. &lthough, a change in government earlier in the year meant that
the new government was not ready with a fresh bill, and hence the recently issued
ordinance in order to comply to the 'T< regulations. The ordinance on patent third
amendment act meant that India would transform into the era where the intellectual
property rights will be respected and will have a legal framework for enforcement.
E@pectato$ $ ,<<-
The year $..C was an eventful year with new companies entering into the bandwagon
for pharma exports. !owever, $..5 is likely to be MtheF year of execution for most of the
companies. &s far as the domestic markets are concerned, the patent ordinance will
definitely instill confidence among players in the industry. !owever, we may not see a
sudden ;ump in revenues and profits of 9(3 companies as they may approach new
product launches with caution.
<n the exports front, the IS government has intensified its efforts towards usage of
generics drugs. "rugs worth ISK %5 billion are going off patent in the next three years
and Indian companies are likely to be the biggest beneficiaries of the same. 'hile Indian
companies like *anbaxy, Sun ?harma, Jupin Jabs and "r. *eddyFs are likely to get the
benefits directly they might feel competitive pressures as 9(3 players are sourcing
their drugs from India thus reducing the costs. $..5 is, thus, likely to witness greater
global acceptance of India as a pharmaceutical power to reckon withX
111
'oc?(ar8t
Per7or%a$ce
"omestic pharma company, 'ockhardt, recently declared its "ecember #uarter as well
as full year numbers. In CS3N.C, the companyVs consolidated revenues clocked a
buoyant $-> growth led by strong performance in Europe and rest of the world. Its
bottomline growth was e#ually buoyant at $6> NoN. The company ended the full year
with over %-> revenue and nearly 5.> bottomline growth.
/R! %2 =BCY<
>
=BCY<
=
C(a$0e CY<> CY<= C(a$0e
(et sales $,B%B %,C%B $-.-> 4,C$. -$,%B4 %-.5>
Expenditure $,$C$ $,64A $..%> A,6$6 4,5AA $5.6>
<perating profit 7EB"IT&8 546 AC- $C.%> -,A4C $,B-$ 56.A>
<perating profit margin 7>8 $-..> $-.6> -4..> $$.A>
<ther income 65 -5$ -%%.B> AC -5B --%.5>
Interest 7$A8 7--48 0 C 7-A8 0
"epreciation B% 44 -4.%> $6A %6B %A.B>
?rofit before tax 6.5 4-% 5..4> -,54A $,6-4 6C..>
Extraordinary expenditure 0 7--%8 0 0 7--%8 0
Tax -.$ -6B 6C.A> -A- %A- --A..>
?rofit after tax7loss8 5.% 6%$ $5.6> -,C$6 $,-%5 C4.A>
(et profit margin 7>8 -A.A> -B.C> -5.-> -A.$>
(o. of shares 7m8 A$.6 -.4.. A$.6 -.4..
"iluted earnings per share 7*s8Y -%.- -4.6
?E ratio 7x8 -4.$
7Y annuali+ed8
112
Co%pa$6 Pro71e
'ockhardt is one of the leading domestic pharma companies with strong presence in the
lifestyle segment and growing focus on biotechnology. The company, a few years back,
was focused on the domestic market, but intense price competition and price regulations
resulted in the company gradually shifting its focus to exports. 3onse#uently, 'ockhardt
ac#uired two IL0based companies 'allis Jaboratories and 3? ?harma. The company
now derives 6.> of its revenues from non0India regions. The company has proven its
*D" capabilities by indigenously developing and launching Biovac0B 7hepatitis 0 B8
vaccine, 'epox 7Erythropotein8 and 'osulin 7human insulin8.
Per7or%a$ce $ CY<=3
Europe poto$3 Though European growth has slowed down post the ac#uisition spurt,
the region still clocked a healthy $4> revenue growth. Gust to put things in perspective,
the revenues from European business in Gune #uarter last year were *s %%% m, while the
revenues in September #uarter $..% significantly increased to over *s - bn, led by the
ac#uisition of 3? ?harma. /or the full year, the region grew by a significant AA> NoN
and now forms C$> of 'ockhardtFs revenues. In 9ay $..C, 'ockhardt ac#uired
Mesparma )mb!F to give its )erman plans a fillip. Incidentally, )ermany is the largest
branded generics market in Europe.
US T(e e%er0$0 8r#er3 )oing forward, the companyVs growth is likely to gain
momentum in the IS, where it launched % new products under the 'ockhardt banner
during third #uarter of $..C. 'hile the IS market grew by a staid %> in September
#uarter, in "ecember #uarter it displayed signs of picking up pace with nearly -.>
revenue growth. IS accounted for B.%> of consolidated 3N.C revenues. The regionFs
share in the pie is likely to go up over the next couple of years.
Ho%e !core3 The sales in the domestic market were up -.> during the #uarter and over
-%> in 3N.C. The field force re0structuring in the domestic market, as well as buoyancy
in the lifestyle segment 7biotechnology, (ephrology, "iabetology8 has helped company
beat the industry growth rate. The %. power brands of the company, which constitute
113
B.> of the domestic revenue, grew by -5> in 3N.C. &lso, the revenues from its biotech
portfolio grew by B-> NoN during 3N.C. 'epox 7Erythropoeitin8 is growing at CA>
plus and 'osulin, which has completed one year of its launch, increased its market share
to about 6>0A> in domestic insulin market.
Geo0rap(ca1 M@L
/R! %2 =BCY<
>
=BCY<
=
India -,.5A -,-6C -..-> C,%C$ C,4-6 -%.$>
Europe -,$-4 -,5AC $4.-> $,4%B 5,$.6 AA.$>
IS %.C %%C 4.4> -,.AA -,.%% 0C.->
*est of 'orld $54 %65 C..4> -,.6C -,$%% -5.4>
Tota1 ,)N>+ >)=>: ,*.*K +)=,* *,)>NN >*.-K
Mar0$ !tor63 The operating profit grew faster than the revenues. The basic reason for
this is the increased contribution from the European markets, where margins are higher,
as also the benefits of restructuring. Increased contribution from the high margin
formulations business has also expanded operating margins. !owever, this margin
profile is likely to be affected once competition picks up in the European markets. &lso,
companyVs recent entry into the IS market on its own will affect the margins, as the cost
of establishing sales and marketing network will take its toll, at least in the near term.
Bu!$e!! M@L
/R! %2 =BCY<
>
=BCY<
=
/ormulations $,C%4 $,456 $-.$> A,AAB -.,6-6 %6.5>
Bulk "rug C.. CB$ $..5> -,6C% -,AA$ A.4>
Tota1 ,)N>+ >)=>N ,*.*K +)=,* *,)>NN >*.-K
114
Ta@ pro#!o$ a$8 e@traor8$ar6 e@pe$!e!3 (et profit grew by $6> in the #uarter and
by 5.> in 3N.C. The company has recently issued /33BVs 7/oreign currency
convertible bonds8 worth ISK --. m. The interest charges are likely to increase owing
to increased borrowings for funding ac#uisitions. 9oreover, as the companyFs
contribution from the European operations pick up, the tax outgo could increase, as
effective taxes are higher in those countries. The extraordinary expense of *s --% m in
CS3N.C as well as 3N.C pertains to restructuring expenses in IL, as well as cost of
setting up the IS office.
The company has achieved robust growth on the back of its inorganic strategy over the
past few #uarters. &part from this, changing geographical mix and streamlining of
operations has helped 'ockhardt to maintain healthy margins over the last few #uarters.
E@pectato$!
&t *s %A6, the stock is trading at -4 times 3N.C earnings. 'ockhardt, despite its past
strong presence in the domestic market, has failed to capitali+e on the same over the
years. But with its recent focus on the international markets and some prudent
ac#uisitions in Europe, growth prospects look promising. The company has achieved
significant topline and bottomline growth in 3N.C, basically on the back of inorganic
growth and restructuring moves. /urther benefits of the restructuring are likely to filter
in during $..5. The business strategy looks viable. 'e will update our report on the
company soon.
115
WOCKHARDT (WOCK)
Li ve BSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
3)3.*5
Open (Rs)
3)).)0
High (Rs)
3*0.00
Low
(Rs)
3)1.05
%
Change
0.3*
Vo!"e
22$*03
Va!e
(Rs)
*$#09$900
52%
&ee'
H(L
391.50
(
23#.25
Li ve NSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
3)5.30
Open (Rs)
3)).05
High (Rs)
3*4.00
Low
(Rs)
3)3.00
%
Change
0.29
Vo!"e
#1$904
Va!e (Rs)
23$429$300
52%
&ee'
H(L
116
405.90
(
224.#5
Val uat i on
+P, (Rs)-
19.10
P(+ Ra.io (/)
19.5)
0ar'e. Cap (Rs
")
40$#)4.**
P(1V (/)
*.59
ACC
A.C.C. (ACC)
Li ve BSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
3##.45
Open (Rs)
3)0.00
High (Rs)
3)2.30
Low
(Rs)
3#5.#0
%
Change
%0.)2
Vo!"e
219$2*0
Va!e (Rs)
*0$*99$104
52%
&ee'
H(L
3*5.00
(
21*.00
Li ve NSE Quot es
Mar 11, 2005
( Cl ose)
Price
(Rs)
3##.55
Open (Rs)
3#9.50
High (Rs)
3)2.40
Low
(Rs)
3#5.#0
% Vo!"e Va!e (Rs) 52%
117
Change
%0.)#
52)$*09 194$#42$304 &ee'
H(L
3*#.*5
(
220.90
Val uat i on
+P, (Rs)-
1).*0
P(+ Ra.io (/)
20.59
0ar'e. Cap (Rs
")
#5$31#.05
P(1V (/)
4.95
-2raiing 12 "on.hs earnings 3 1,+ ,ense/ 3
,4P C56 5i7.8
E@cerpt! 7ro% t(e $ter#eF Ft( &ort! Securte!
The two stocks that performed really well in the bourses during the year $..C were the
stocks of S&IJ D Task pharma. The banking stock SBI and the pharma stock *anbaxy
were the moderate performers in the same year. The worst performing stock was that of
the B?J because of the ongoing feud in the family. &fter the budget announcement by
the finance minister the Sensex fell drastically because of the sheer panic due to the
constant policy differences between the ruling government and the left parties
7introduction of the STT was also responsible of the downward trend of the index8.
!owever it has bounced back and has hit a record high of 66B. in the beginning of the
year $..5.
.
S&IJ will continue to perform well in the year $..5 due to the rising domestic as well as
foreign demand for steel. *anbaxy too has a positive year ahead with India moving into
the product patent regime. The stock price will depend on the companyFs ability to come
out with newer drugs since they have invested heavily in the * D ".Task pharma
continues to perform well in the year $..5. The future of the B?J stock is unpredictable
unless the ongoing family feud is resolved.
Bharti Televentures is another company whose stock has really performed well in the
year $..C.This is mainly because of their increasing revenues from their landline
connections, broadband facilities and their licenses to offer cellular services in the newer
118
circles such as G D L. 9oreover they also have the first mover advantage in the telecom
sector. The outsourcing of their complete network management to IB9 and their focus
on customer service has definitely contributed to the upward movement of the stock.

(eneral )uestions
-. The Sensex dropped drastically post budget $..C mainly because of the sheer
panic reaction. There were some differences between the ruling government and
the left parties over some policy issues and the introduction of the STT was in
some way responsible for the downfall of the Sensex. The investors were unclear
about the STT and it was their panic move that resulted in Sensex dropping
sharply.
$. The coming budget is definitely a good one for the stock market. The investors
were unmoved by the hike in the STT in the recent budget. They all took a
broader view of the budget which is generally perceived to be a positive one for
the market and industry. *iding high on the back of the positive measures the
Sensex witnessed a smart rally and closed strong at 6A-C up -CC points.
%. The imposition of @&T will not cause much change in the Sensex. !owever the
@&T will take sometime to be implemented and it may not be implemented
according to the deadline given by the government.
C. The hike in the STT is a good move by the finance minister and it will not create
any problems from the investor community. STT may continue to be hiked on a
year on year basis.
The /IIs are planning to invest heavily in India in the near future. Jots of money is
waiting outside India in the hands of the /IIs to be invested in the Indian market. The
investment that these /IIs make in India is very miniscule compared to the total si+e
of their holding.
E$er06 !ector
119
-. The ongoing family feud had a very little impact on the performance of the stock
mainly because *eliance is such a large holding and a highly trusted and stable brand in
the eyes of the investors.
$. There is no likelihood that the splitting 7if it happens8 of the company will affect its
stock performance in a ma;or way.
%. The approval of the Iran gas pipeline is a ma;or boost for the company. But unless the
pro;ect is executed nothing can be predicted about its impact on the companyFs stok.
<il sector as a whole was a laggard one in the year $..C.The share price of oil
companies !?3J D B?3J were badly affected owing to the divestment of these two
?SIs. The share prices of these two companies are slowly bouncing back this year.
Ce%e$t !ector
$. The top performer in the cement sector in the year $..C was the )rasim cements.
IT !ector
The IS presidential elections were a ma;or concern for this sector because of the
outsourcing issue involved. &ll the fears were laid to rest with 9r. Bush becoming the
&merican president 79r.Lerry was anti0outsourcing8. There was not much variations in
the stock prices of the IT giants. <utsourcing is the way to the future and all the big
companies are doing it in large scale to reduce costs.
-. 'ith the IT giants like Infosys and 'ipro ;oining the billion dollar club, the
small companies are really facing a uncertain future. The smaller companies like
?olaris, (IIT etc are losing their clients to their bigger competitors. The clients
are turning to the bigger IT companies because of their larger si+e and their
capability to offer everything under one roof. Barring a few companies like
9phasis B/J most of the small companies are facing difficult challenges to
survive which is adversely affecting their stock prices in a big way.
120
P(ar%a !ector
-. 'ith India moving into the product patent regime the pharma sector is bound to
have a bright future. Indian pharma giants like *anbaxy, 3ipla have an established
presence in the (orth &merican and European markets and have a very bright year
ahead. &lso these companies have invested heavily in their * D " facilities which
will definitely give them a good *<I in the near future. The capability of these
pharma ma;ors to come up with new drugs will be the ma;or factor in their stock
performance. <verall the pharma sector has a very bright future ahead.
$. Exports are bound to rise in the near future though not as much as %.> but
considerably little less. !owever in the long run the Indian ?harma sector will
definitely boom and has a very positive $..5 ahead.
%. The entry of small companies will not affect the larger ones in a big way because
in the ?harma sector there is space for everyone. The big giants can always fall back
on their superior * D " facilities to come out with newer drugs compared to the
smaller companies.
Technical analysis is the prediction of future performance of a stock based on the
historic data available using different techni#ues. It is a complex task of analy+ing
statistical data and graphs to predict the future outlook of a companyFs stock.
"ifferent ratios are involved to analy+e the stock of a company 7E?S, "ebt0E#uity
etc.8 and prepare a financial report of the company that can be very helpful for the
investors.
END O& CHAPTER ;I
121

Shares Stocks NSE BSE

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Shares Stocks NSE BSE

Uploaded by

Copyright:

Available Formats

STOCK MARKET TRENDS IN INDIA

CHAPTER I SECURITIES MARKET IN INDIA AN OUTLINE

You might also like