EQUITY MARKETS IN INDIA - AN OVERVIEW

1 Equity Markets In India – An Overview

INDEX

1. 2. 3. 4. 5. 6. 7. 8. 9.

Equity Market- Introduction Developments In Equity Market Equity As An Investment Investing Principles Primary Market Methods Of Marketing In Primary Market Intermediaries In Primary Market Secondary Market Reasons For Transiting In Secondary Market

3 5 10 11 28 29 38 41 45 46 46 54 55 65 70 76 80 82 85 87

10. Functions Of The Secondary Market 11. Listing 12. Delisting 13. Trading 14. Intermediaries In Secondary Market 15. SEBI (Securities & Exchange Board Of India) 16. FIIs & Indian Equity Market 17. 2007 A Year To Remember 18. Lessons From Recent Meltdown 19. Conclusion 20. Bibliography

Equity Markets In India – An Overview

2

EQUITY MARKET
In financial markets, stock is the capital raised by a corporation through the issuance and distribution of shares. A person or organization which holds shares of stocks is called a shareholder. The aggregate value of a corporation's issued shares is its market capitalization. When one buys a share of a company he becomes a shareholder in that company. Shares are also known as Equities. value over time. long-term It also Equities have the potential to increase in with the growth have proved necessary to that reach the have out

provides the portfolio Research studies

investment

goals.

the equities

performed than most other forms of investments in the long term. Equities are considered the most challenging and the rewarding, when compared to other investment options.

Research

studies

have proved have yielded

that

investments

in

some shares than

with

a longer

tenure of investment

far superior returns

any other investment.

However, this does not mean all equity investments would guarantee similar high returns. Equities are high-risk investments. Since 1990 till date, Indian One needs to study them carefully before investing. stock market has returned about 17% to investors on an

average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5 % dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the

highest rate of return, if invested over a longer duration.

The first company to issue shares of stock was the Dutch East India Company, in 1602. The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. building of ships, for example, The technique of pooling capital to finance the Before

made the Netherlands

a maritime superpower.

adoption of the joint-stock corporation, an expensive venture such as the building of a

Equity Markets In India – An Overview

3

merchant ship could only be undertaken by governments or by very wealthy individuals or families.

Equity markets, the world over, grew at a great speed in the decade of the nineties. After the bear markets of the late eighties, the world markets saw one of the largest ever bull markets of more than ten years. The opening up of Indian economy in the 1990's led to a series of financial sector reforms, prominent being the capital market reforms. These

reforms have led to the development of the Indian equity markets to t standards of the major global equity markets. All this started with the abolition of Controller of Capital

Issues and subsequent free pricing of shares.

The introduction transactions and

of

dematerialization

of

shares,

leading to

faster

and

cheaper

introduction of derivative products and compulsory rolling settlement

has followed subsequently. Despite a series of stock market scams and crises beginning from 1992 Harshad Mehta's scam to the Ketan Parekh's 2001 scam, the Indian equity

markets have transformed themselves from a broker dominated market to a mass market. The introduction of online trading has given a much-needed impetus to the Indian equity markets. However, over the years, reforms in the equity markets have brought the country on par with many developed markets on several counts. Today, India boasts of a variety of products, including stock futures, an instrument launched only by select markets.

The introduction overhauling the stock comparable with the

of

rolling settlement The most

is

the latest of the

step

in

the direction most regard

of

market. world's

equity market advanced

country will with

likely be to

secondary markets

international best practices. The market moved to compulsory rolling settlement and now all settlements settlement in are executed on T+2 basis and market is gearing up for moving to T+1 2004 while the Straight Through Processing (STP) is in place from

December 2002.

Equity Markets In India – An Overview

4

establishment The principal ones are the formation of repeal of the Capital Issues (Control) Act. introduction of screen-based trading. The many a developments that have assimilated in a relatively lesser time. The formation of Sebi was the first attempt towards integrated regulation of the securities market. Sebi has also issued Disclosure and Investor Protection (DIP) guidelines to ensure fair prices for Equity Markets In India – An Overview 5 . One of the major stumbling blocks in fair pricing of capital issues has been the Capital Issues (Control) Act. DEVELOPMENTS IN EQUITY MARKET The Government of India has been trying to improve market efficiency. Sebi regulates all market intermediaries and has the powers to impose monetary penalties for misconduct of any intermediary. Series Rightly. took long time in the developed markets. of steps realizing the advantages are being taken to of resource allocation through market. increase market efficiency and to make it attractive for the retail investors to take part in the equity market. remove hurdles. It may not be an exaggeration to say that the Indian markets are resourceful to put themselves Indian markets on par with the markets of the developed countries. This is now a matter of the past thanks to the repeal of the Act itself. Securities Exchange Board of India (SEBI). Government of India and Reserve Bank of India have pushing reforms equity markets. of stock exchanges. shortening of trading cycle. enhance transparency and bring the Indian Equity Market up to international standards. 1947.The importance of been equity market in is increasing. demutualization share of depositories disappearance of physical certificates and better risk management systems in stock exchanges. 1947. The issuers were denied the opportunity to economically raise money from the capital market. Many reform measures have been initiated in the 90s.

This avoids physical movement of certificates. While the product range in derivatives is still limited (futures and options on stocks and stock indices). December 2001. derivatives trading products appeared to manage risks in portfolio on Indian exchanges in June 2000. management and trading to eliminate any conflict of interest among the stakeholders to improve market in efficiency the Indian and to focus has on been investor interest. though however. This has helped in increasing trading volumes Equity Markets In India – An Overview 6 . All scrips are now under rolling settlement since The Equity Market is incomplete without values.the investors. Very long settlement cycle was another major hindrance in effecting deliveries in the equity market. it is certainly a major step forward in broadening the financial markets. Sebi has enforced the discipline to compulsorily settle trades in T+3 days since April 2002. (NSCCL) in April 1996 has been a major development in managing counterparty risks in the equity market. The setting up of National Securities Clearing Corporation Ltd.. The introduction of Screen Based Trading Systems (SBTS) by NSE is a major development in the capital market. Often the securities were delivered after 30 days or more due to weekly/fortnightly settlements and carry forward transactions. Another notable to development equity market the introduction of depositories dematerialize the share certificates. bad deliveries and quicker transfer of ownership of shares. NSE was established as a demutualized structure separating the roles of ownership. The geographical barriers to trade were dismantled increased trading volumes. This was possible due to the great advancements in the area of information technology. cost and errors. SBTS electronically matches orders cutting down time. traded and settled in demat form. At long last. Presently all actively traded shares are held. This is slated to reduce to T+2 days from April 2003. This made the markets resulting in more efficient. many issuers in the 90s could unfairly price their capital issues at the cost of the poor common investors. and minimizing the chances of fraud.

Equity Markets In India – An Overview 7 . Over the past few years. markets over a period of time is presented in (Table 1. have helped in reinforcing confidence in While most of the by above measures the Indian equity market providing more transparent and efficient buying. between high-income have accelerated over the years. The correlation of global developing countries. and the widening and intensifying of links. The descriptive statistics of the major markets in terms of daily returns is presented in (Table 1-3). International Scenario: Global integration.since traders are now more confident about default-free settlements. selling and transfer of shares. the financial markets have become increasingly global.2). which shows that the markets are increasingly getting interlinked.

2% in India and 13. which was quite comparable to the other developed markets. During 2006-07. cumulative net investments by FIIs amounted to US $ 51.Cross border capital flows have shifted from public transfers to primarily private sector flows. As may be seen from (Table 1-4). The ten largest index stocks share of total market capitalization is 32. Equity Markets In India – An Overview 8 . It is seen that the index stocks share of total market capitalization in India is 81. Following the implementation years. A comparative study of concentration of market indices and index stocks in different world markets is presented in the (Table 1-5).6% whereas US index accounted for 89.5%.1 %. India ranked 15th in terms of market capitalization (18th in 2004 and 17th in 2005) and 18th in terms of total value traded in stock exchanges and 21st in terms of turnover ratio as of December 2006. of reforms in the securities industry in the past Indian stock markets have stood out in the world ranking. India posted a turnover ratio of 93. Indian market has gained from foreign inflows through investment of Foreign Institutional Investors (FIIs) route.967 million.4% in case of US. As per Standard and Poor's Fact Book 2007.

61 trillion in 2004 to US $ 67.84 % as at end 2006.19 trillion in 2006 (US $ 43.The stock markets worldwide have grown in size as well as depth over the years. The market capitalization of all listed companies taken together on all markets stood at US $ 54. while Indian listed companies accounted for 1.91 trillion in 2006. It is significant to note that US alone accounted for about 48.68 trillion in 2005). Equity Markets In India – An Overview 9 . the turnover of all markets taken together have grown from US $ 39.99 % of worldwide turnover in 2006. As can be observed from (Table 1-6). Despite having a large number of companies listed on its exchanges. The share of US in worldwide market capitalization decreased from 38. India accounted for a meager 0.94% in total world turnover in 2006.85 % as at end-2004 to 35.51% of total market capitalization in 2006.

2 % for high-income countries and 96. Stock or any other security representing an ownership interest. The total number of listed companies stood at 28. the value of securities in a margin account minus what has been borrowed from the brokerage. Equity is a term whose meaning depends very much on the context.6 % as at end 2005.5%. which is a measure of liquidity.733 for high-income countries. In the context of margin trading. countries. Equity Markets In India – An Overview 10 . however. Market capitalization as percentage of GDP in India stood at 68.141 for middle-income countries and 6.9% for the high income countries as at end 2005 and lowest for middle income countries at 49. 3. In general. the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). has not been uniform across The market capitalization as a percentage of GDP was the highest at 112. a car or house with readily sell no outstanding debt the items is considered Stocks the are equity since he or she can for cash. On the balance sheet. EQUITY AS AN INVESTMENT Equity is: 1. was 122. The increase. World Bank' there has been an increase in market capitalization as percentage of Gross Domestic Product (GDP) in some of the major country groups. also referred to as "shareholder's equity". owner's equity For example.177 for low-income countries as at end 2006. The turnover ratio. one can think of equity as ownership in any asset after all debts associated with that asset are paid off. 11.According to the 'World Development Indicators 2007. 2.6 % for low-income countries.

Invest for Real Returns Keep an Open Mind Never Follow the Crowd Everything Changes Avoid the Popular Learn from your Mistakes Equity Markets In India – An Overview 11 .because they represent ownership of a company. 6. equities also hold the potential to be a very risky asset class and expose the portfolio to high levels of volatility. when the investor is typically closer to retirement (shorter investment horizon) and has a lower risk appetite as well. often chronicled fact. 4. over shorter time frames. Similarly financial planners advocate pruning of the equity holdings with advancement in the investor’s age. However. INVESTING PRINCIPLES 1. 3. This is the primary reason why any fund manager worth his salt always recommends a sufficiently long (at least 3 years) time frame for an equity-oriented investment. The ability of equities to deliver over longer time frames property and bonds is an and even outperform other investment avenues like gold. 2. whereas bonds are classified as debt because they represent an obligation to pay and not ownership of assets. 5.

To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward. If a particular industry or type of security becomes popular with investors. may not return for many Equity Markets In India – An Overview 12 . prove temporary and. 9. that popularity will always years. Buy During Times of Pessimism Hunt for Value and Bargains Search Worldwide 10.7. And so have bull markets. It is impossible to produce a superior performance unless you do something different from the majority. when lost. Share prices usually turn upward from one to twelve months before the bottom of the business cycle and vice versa. Bear markets have always been temporary. No-one Knows Everything If you buy the same securities as other people. 8. you will have the same results as other people.

company’s income and growth. For this EQUITY RESEARCH is done. it uses the various sources of financial accordingly advises in which company an the country and investor should invest. FUNDAMENTAL ANALYSIS The investor while buying stock has the primary purpose of gain.The investor should bear in mind that while he makes investment decision. balance sheet and statement of working through changes of income. which an investor wishes to buy. information available in In the process. If he invests for a short period of time it is speculative but when he holds it for a fairly long period of time the anticipation is that he would receive some return on his investment. Equity Research does the research of he should have idea of the company’s break-even point and company’s position in the stock exchange. Equity Markets In India – An Overview 13 . The method for forecasting the future behavior of investments and the rate of return on them is clearly through an analyze of the broad economic forces The kind of industry to which statements they belong and like income in which they operate. Fundamental analysis is a method of finding out the future price of a stock. the analysis of the company's internal statement.

Likewise. prefer to consumer invest in like refrigerators cars. getting a large For Broadly the investor of share in the those industries amount of the development of the country. service industries investors should like health. which the investor may consider for investments. Equity Markets In India – An Overview 14 . RESEARCH AND TECHNOLOGICAL DEVELOPMENTS: The economic forces relating to investments would be depending on the amount of resources spent by the government on the particular technological should funds invest in development which are affecting the future. In some countries the population growth has slowed down whereas in India and some other third world countries there has been a population explosion. which have a large amount of labor force because in the future such industries will bring better rates of return. example. A study of the economic forces would give an idea about future corporate earnings and the payment of dividends and interest to investors. Population explosion will give demand for more industries demand like hotels.ECONOMIC ANALYSIS Investors are concerned with those forces in the economy. which affect the performance of organizations in which they wish to participate. and residences. in India in the present context automobile industries and spaces technology are receiving a greater attention. industries. 2. through purchase of stock. These may be areas. Some of the broad forces within which the factors of investment operate are: 1. POPULATION: Population gives an idea of the kind of labor force in a country.

INDUSTRIAL ANALYSIS The industry has been defined as homogeneous groups of people doing a similar kind of activity or similar work. (B) Banking and Insurance. which is published. In India. CAPITAL FORMATION: Another consideration of the investor should be the kind goods and the capital it invests in of investment that and a in capital modernization an investor company makes replacement of assets. (D) Cement. (C) Textiles. new development technological synthetics and overall discoveries in the condition of corporate growth. A particular industry or a particular company which would like to invest can also be viewed at with the help of the economic indicators such as the place. recycling of materials. nuclear and invest solar energy and in untapped should give the investor an opportunity to or recently tapped resources which would also produce higher investment opportunity. the broad classification of industry is made according to stock exchange list. 4. group to which it 110ngs and the year-to-year returns through corporate profits. NATURAL RESOURCES AND RAW MATERIALS: The natural resources are to a large extent improvement responsible for a country's economic In India. This gives a distinct classification to industry to industry in different forms such as: (A) Engineering. (E) Steel Mills and Alloys. Equity Markets In India – An Overview 15 . value and property position of the industry.3.

Industry life cycle may also be studied through the industrial life cycle state. (H) Sugar. (I) Information Technology. There are generally three stages of an industry. (G) Retail. expansion stage and stagnation stage. These stages are pioneering stage. Equity Markets In India – An Overview 16 . (J) Automobiles and Ancillary. (L) FMCG. (M)Miscellaneous. Industry should also be evaluated or analyzed through its life cycle. (K) Telecommunications.(F) Chemicals and Pharmaceuticals.

Production there will be a great demand for the product. run the business and most of the other firms are wiped out in the pioneering 2. This stage lasts from five years to fifty years of a firm depending on the potential and productivity and policy to meet the change of competition and rapid change in buyer and customer habit. competition is there. THE EXPANSION STAGE: The efficient firms. the profits are also very high as the technology is new. At this stage. the. market becomes competitive. and technological developments increase in During this time the investor will will rise and in relation to the activity of the firm. during ill Although number of firms pioneering stage itself and there are a large number of firms left to run the business in the industry. The market competitive pressures keep on increasing with the en" of new-firms and the prices keep on declining and then ultimately profits fall. This is the time when each one has to show competitive strength and superiority.1. but having waited for the stability period there has been a dynamic selection process and a few of the large number of firms are left in the industry. At this stage all firms compete with each other and only a few efficient firms are left to stage itself. which have been in the market now. After this stage develops the stage of stagnation or obsolescence. The investor will find that this is the best time to make an investment. THE PIONEERING STAGE: - The industrial life cycle has take place. Equity Markets In India – An Overview 17 . At the pioneering stage it was difficult to find out which of the firm to invest in. find that it is time to have gone down stabilize them. Taking a look at the profit many new firms enter into the same field and ill. a pioneering stage when the new inventions notice great production. This is the period of security and safety and this is also called period of maturity for the firm.

as evaluated by the fundamental analysis. Profits are also there but the growth in the firm is lower than it was in the expansion stage. which fundamental analyst. This organization. COMPANY ANALYSIS Company analysis of a firm position and earning is a study of the variables that influence the future of a firm profitability. They believe that the market price of share in a period of time will move towards its intrinsic value. If the market price of a share is lower than the intrinsic value. sales THE STAGNATION STAGE: During the stagnation stage the investor will find that although there is increase in of an organization. The industry finds that it is at a loss of power and cannot expand. this is not in relation to the profits earned by the company. It is a method of assessing the competitive position and its ful1l with respect to the earning of its shareholders. begin to change their course of action and start on a new venture should make a continuous evaluation of their investments. In firms in which they have received profits for large number of years and have reached stagnation they can plan to their investments and find better avenues in those firms where the expansion stage has set in. The fundamental which is nature of this analysis is that each share of a company has an intrinsic value. During most of the firms who have realized the competitive nature of the industry and the arrival of the stagnation stage. and the statement of Equity Markets In India – An Overview 18 .3. then the share is supposed to be undervalued and it should be purchased but if the current market price shows that it is more than intrinsic value then according to the theory the share should be sold. the balance sheet. are the income statement. quality of management and record of its earnings and dividend. basic approach is analyzed through the are financial required statements as tools of an of the The basic financial statements. the efficiency with which it operates its financial both qualitatively and quantitatively. dependent on the company's financial performance.

a function of supply and demand. Prices are. Prices all known information they also represent human intrinsic facts. panic. end.changes in financial position. Markets may move based "technician" attempts decisions based upon to upon people’s expectations. human elation. While evaluating a company. Complete. of A market component trading by making his reflect both facts and chart formations. on a moment to moment basis. Consistent and Comparable TECHNICAL ANALYSIS Technical analysis is simply the study of prices current prices should represent not only reflect as reflected on price charts. emotions…fear. etc. disregard the emotional not necessarily facts. greed. assuming that prices Equity Markets In India – An Overview 19 . creditors as well as internal management of a firm and on the basis these statements the future course of action may be taken by the investors of the firm. its statement must be carefully judged to find out that they are: (a) (b) (c) (d) Correct. These statements are useful for investors. in the However. also dramatically effect prices. emotion and the pervasive mass psychology and mood of the moment. hysteria. Technical analysis assumes that about the markets.

TRENDS The stock chart trend. A trend reflects stock's price over time. Also. This second type of data is called a PRICE BAR. is used to identify the current the average rate of change in a Trends exist in all time frames and all markets.emotion. DOWN or RANGEBOUND. The plots are connected together in a single line. creating the graph. In an uptrend. CLOSING. Analysts use their technical research to decide whether the current market is a BULL MARKET or a BEAR MARKET. 2. A LOGARITHMIC chart is a percentage growth chart. Individual data plots for charts can be made using the CLOSING price for each day. Trends can be classified in three ways: UP. Individual price bars are then overlaid onto the graph. Each individual equity. a stock Equity Markets In India – An Overview 20 . 1. market and index listed on a public exchange has a chart that illustrates this movement of price over time. creating a dense visual display of stock movement. a combination of the OPENING. Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. HIGH and/or LOW prices for that market session can be used for the data plots. STOCK CHARTS A stock chart is a simple two-axis (X-Y) plotted graph of price and time.

some change in BOTTOMS. Very often a straight line can be drawn UNDER three or more pullbacks from rallies or OVER pullbacks from declines. near a top value or conditions Declining stocks will continue to fall until occur. stock declines often with intermediate periods of consolidation or movement against the trend. individual Stock charts the participation volume of the through pane. there will be a NEGATIVE rate of price change over time. In a downtrend. Trends be measured TRENDLINES. or a bottom can be very profitable. There is no apparent direction to the price movement on the stock chart and there will be LITTLE or NO rate of price change. When price bars then return to that trend line. A stock in an uptrend will continue to rise until some change in value or a condition occurs. In doing so. In a downtrend. 3.rallies often with intermediate periods of consolidation or movement against the trend. VOLUME Volume measures crowd. Chart readers try to Taking can locate TOPS a position using and which are those points where a rally or a decline ends. it draws a series of lower highs and lower lows on the stock chart. Range bound price swings back and forth for long periods between easily seen upper and lower limits. Trends tend to persist over time. In a an there will be a POSITIVE rate of price change over time. uptrend. they tend to find SUPPORT or RESISTANCE and bounce off the line in the opposite direction. In doing so. display HISTOGRAMS below the price Often these will show green bars for up days and red Equity Markets In India – An Overview 21 . it draws a series of higher highs and higher lows on the stock chart.

PATTERNS AND INDICATORS How can one organize the endless stream of stock chart data into and a logical to format? look at Charts past allow present investors traders and price action in order to make reasonable predictions and wise choices. Stock chart analysis does not work well on illiquid stocks.bars for down days. stock can easily fall. 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. In other words. determines Liquid stocks are very easy for traders to buy and sell. stocks under accumulation often will rise some time after the buying begins. Rallies require the enthusiastic participation of the crowd. Stocks trade daily with an lagging (behind) or leading average volume that (ahead) the price their LIQUIDITY. 4. It takes volume for a stock to rise but it can fall of its own weight. When a rally runs out of new participants. Alternatively. Investors and traders use indicators such as a ON BALANCE VOLUME to see whether participation is action. It is a highly visual medium. Liquid stocks require very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated quickly from a portfolio. Stocks that are bought with greater interest than sold are said to be under ACCUMULATION. Accumulation and distribution often LEAD price movement. stocks under distribution will often fall some time after selling begins. This one fact separates it from the colder world of value-based analysis. Stocks that are sold with great interest than bought are said to be under DISTRIBUTION. The stock chart Equity Markets In India – An Overview 22 .

Oscillators react very quickly to short-term changes in price. react much RSI and RATE OF They CHANGE. Almost all indicators can be categorized as TREND-FOLLOWING or OSCILLATORS. flipping back and forth between OVERBOUGHT and OVERSOLD levels. So it's no surprise that over the last century two forms of analysis have developed that focus along these lines of critical examination. Equity Markets In India – An Overview 23 . DOUBLE BOTTOMS and FLAGS. The newer is INDICATOR ANALYSIS. TRIANGLES. Indicator analysis uses math calculations to measure the relationship of current price to past price action.activates both left-brain and right-brain functions of logic and creativity. Pattern analysis gains its power from the tendency of charts to repeat the same bar formations over and over again. The oldest form of interpreting charts is PATTERN ANALYSIS. form a classic book written on the subject just after World War II. ON BALANCE VOLUME and MACD. Popular trend-following indicators include MOVING AVERAGES. chart landscape features such as GAPS and TRENDLINES are said to have great significance on the future course of price action. look deeply into the rear view mirror to locate the future. DOUBLE TOPS. This method gained popularity through both the writings of Charles Dow and Technical Analysis of Stock Trends. Also. RECTANGLES. Some well-known ones include HEAD and or bearish SHOULDERS. Trend-following indicators more slowly than oscillators. having a bullish These patterns have been categorized over the years as bias. a math-oriented examination in of interpretation which the basic elements of price and volume are run through a series of calculations in order to predict where price will go next. Common oscillators include STOCHASTICS.

conditions are "bullish". rises and falls. Additionally. if price starts to move sharply upward or downward. uses important investors and traders. Take the sum of any number of previous CLOSE prices and then divide it by that same number. Chart interpretation using these two important analysis tools uncovers growing stress within the crowd that should eventually translate into price change. moving averages will slope upward or downward over time. Moving averages LAG price.Both patterns and indicators measure market psychology. This creates an average price for that stock in that period of time. MOVING AVERAGES The This most popular is has tool technical many indicator for for studying stock versatile charts the MOVING AVERAGE. This adds another visual dimension to a stock analysis. 5. moving average computation. In other words. The power of the moving average line comes from its direct interaction with the price bars. it will take some time for the moving average to "catch up". When below. A moving average can be displayed by re-computing this result daily and plotting it in the same graphic pane as the price bars. Current price will always be above or below any When it is above. This "crowd" tends to develop The core of investors characteristics that repeat and traders that make up the market each day tend to act with a herd mentality as price known themselves over and over again. conditions are "bearish". Equity Markets In India – An Overview 24 . Plotting moving averages in stock charts reveals how well current price is behaving as compared to the past.

Moving averages define STOCK TRENDS. They can be computed for any period of time. Investors and traders find them most helpful when they provide input about the SHORT-TERM, INTERMEDIATE and that reflect LONG-TERM trends. For this assist reason, using

multiple moving averages

these characteristics

important

decision

making. Commons moving average settings for daily stock charts are 20 days for shortterm, 50 days for intermediate and 200 days for long-term.

One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur when two moving averages representing

different trends. For example, when a short-term average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a short-term crosses ABOVE the

long-term, a BUY signal is generated.

Moving averages can

be "speeded

up" through

the application

of further math

calculations. Common averages are known as SIMPLE or SMA. These tend to be very slow. By giving more weight to the current changes in price rather than those many bars ago, a faster EXPONENTIAL or EMA moving average can be created. Many technicians favor the EMA over the SMA. Fortunately all common stock chart programs, online and offline do the difficult moving average calculations but plot price perfectly.

6. SUPPORT AND RESISTANCE
The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts.

Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance defines

Equity Markets In India – An Overview

25

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. Resistance 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.

When price pushes above resistance, it becomes a new support level. When price falls below support, that level becomes resistance. When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT and jumps in to buy or sell. buyers or sellers, known as a When a level is penetrated but does not attract a crowd of

it often falls back below the old support or resistance. This failure is FALSE BREAKOUT. Support and resistance come in all varieties and

strengths. They most often manifest as horizontal 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 required to break the

level. Also, the greater volume traded at any level, the stronger that level will be.

Support and

resistance exist in all

time frames and all

markets. Levels

in longer time

frames are stronger than those in shorter time frames. The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today. The behavior patterns that he observed apply to markets throughout the world.

Equity Markets In India – An Overview

26

PRIMARY MARKET
Primary market and issue equity, is the place where issuers create debt or hybrid instruments for

subscription by the public; the secondary market enables the holders of securities to trade them. Primary market is a market for raising fresh capital in the form of shares. Public limited companies that are desirous of raising capital funds through the issue of securities approach this market. The public limited and government companies are the issuers and individuals, institutions and mutual funds are the investors in this market. The primary market allows for the formation of capital in the country and the accelerated

industrial and economic development.

Everywhere in markets.

the

world

capital

markets up

have originated in

as

the new issues with them a

Once industrial

companies

are set

a big number and for

considerable volume of develops.

business comes into

existence a market

outstanding issues the capital market

In the absence of secondary market or the stock exchange,

will be paralyzed.

This is on account of the reason that the business enterprises borrow

money from the capital market for a very long period but the investors or savers whose savings are canalized through the capital market generally wish to invest only for a short period. Existence of the stock exchange provides a medium through which these two ends can be reconciled. wish to do so. It enables the investors to sell their shares for money whenever they the business enterprises keep the possession of permanent capital;

Thus,

the shares can keep on changing hands.

In order to sell upon

securities,

the company has to fulfill method

various requirements It is

and decide to obtain the

the appropriate

timing and

of issue.

quite normal

assistance of underwriters, merchant banks or special agencies to look after these aspects.

Equity Markets In India – An Overview

27

METHODS OF MARKETING IN PRIMARY MARKET
1. PUBLIC ISSUE: A public limited company can raise the amount of capital by selling its shares to the public. Therefore, it is called public issue of shares or debentures. For this purpose it has to prepare a 'Prospectus'. A prospectus is a document that contains information

relating to the company such as name, address, registered office and names and addresses of company promoters, managers, Managing Director, directors, company secretary, legal advisors, auditors and bankers. It also includes the details about project, plant location,

technology, collaboration,

products, export obligations etc. The company has to appoint

brokers and underwriters to sell the minimum number of shares and it has to fix the date of opening and closing of subscription list.

The new issue of shares

or debentures of a

company are offered

for

exclusive

subscription of general public. The prospectus should be approved by SEBI. A minimum of 49 per cent of the amount of the issue at a time is to be offered to public. The company makes a direct offer to the general public to subscribe the securities of a stated price. The securities may be issued at par, at discount or at a premium. An existing company may

sell the shares at a premium. There is no practice of selling shares at a discount in India.

Public issue is a popular method of raising capital. It provides wide distribution of ownership securities. It also promotes confidence of investors through transparency and

non-discriminatory basis of allotment. It satisfies compliance with the legal requirements. However, the issue of securities through prospects is time consuming because there are

Equity Markets In India – An Overview

28

commission. This method also deprives the common investors of an opportunity to subscribe to the issue of shares. OFFER FOR SALE: A Company sells the securities through the intermediaries such as issue houses. and other due to 2. PRIVATE PLACEMENT: A Company makes the offer of sale to individuals and institutions privately without the issue of a prospectus. and stockbrokers. the company makes an offer for sale of its securities to the intermediaries stating the price and other terms and conditions. underwriting. to be completed by the company. This saves the cost of issue of securities. This method can be used when the stock market is bull. The cost of raising capital is also brokerage. This is known as an offer for sale method. It is suitable for small companies as well as new companies. This has become popular in recent days. The intermediaries can make negotiations with the company and finally accept the offer and buy the shares from the company.various formalities very high administrative costs. The intermediaries have to bear the expenses of this issue. The company has to complete a very few formalities. The Equity Markets In India – An Overview 29 . Institutional investors play a very important role in the private placement. However. publicity. They can create artificial scarcity and increase the prices of shares temporarily and then sell the shares in the stock market and mislead the common and small investors. the private placement helps to concentrate securities in the few hands. This method is less expensive and time saving. The securities are placed at higher prices to individuals and institutions. 3. Then these securities or shares are re-sold to the general investors in the stock market normally at a higher price in order to get profit. legal. Initially.

The investor-sponsors make profits because the shares are listed at higher price. There is an agreement in which an outright sale of a chunk of equity shares is made to a single sponsor or the lead sponsor. The promoters of the company. There are three parties involved in the bought out deals. The through the issue of prospectus to are sold successful applicants on the basis of their demand. current market sentiments etc. and The sale price is finalized through negotiations between the issuing company It is influenced by various factors such as project evaluation. 4. the purchasers. The general publics get the shares at a higher price the middlemen are more benefited in this process. These shares are sold at over the Counter Exchange of India or at a recognized stock exchange. sponsors are merchant bankers and co-sponsors are the investors. securities it is called Initial Public Offer. sponsors and co-sponsors. Bought out deals are in the nature of fund-based activity where the funds of the merchant bankers are locked in for at least for a minimum period. INITIAL PUBLIC OFFER: When a company makes public issue of shares for the first time. The Equity Markets In India – An Overview 30 . reputation of the promoters. Listing takes place when the company gets profits and performs well. The issues can also be underwritten in order to ensure full subscription of the issue. 5.object of this issue is to save the time. BOUGHT OUT DEALS: A Company makes an outright sale of equity shares to a single sponsor or the lead sponsor and such deals are known as bought out deals. cost and get rid of complicated procedure involved in the marketing of securities.

There may be two or more underwriters in case of large issue. An underwriter is generally an investment banking company. While businesses may have their ups and downs. The company has to issue a prospectus giving full information about the company and the issue.company has to appoint underwriters in order to guarantee the minimum subscription. It has to issue share orders the application from forms through and the brokers and with of the stock underwriters. there is greater need to exert caution and pick the best IPO investments. With more and more companies coming out with tempting IPO or additional offers. Following four critical factors should be studied in an IPO offer document. thereby ensuring regular growth in the company. Equity Markets In India – An Overview 31 . investment: Promoter. He can sell these shares in the market afterwards and make profit. This method saves time and avoids complicated procedure of issue of shares. Performance. Prospects and Price. exchange. A good promoter or management team is important for any business success. especially over long periods. company. before making an IPO Check Promoter Standing This by far is the most important factor in any investment decision. a good management will take all necessary steps to ensure profitable performance. The underwriter charges some commission for this work. The underwriter agrees to pay the company a certain price and buy a minimum number of shares. if they are not subscribed by the public. they would be constantly looking at new business opportunities. Secondly. accounts The brokers collect their clients place orders the help The company then makes allotment of shares with The share certificate are delivered to the investors or credited to their demat through the depository.

Therefore. Look for any window dressing. Study Company Performance The share price is the reflection of the operational performance of the company. Check the objects. Look at the loans given to group companies. would mean poor performance on the stock exchange. Therefore. See whether the company is a defaulter to the banks/FIs and the reason thereof. which will add to the bottom-line of the company? Equity Markets In India – An Overview 32 . companies the experience by him. Poor numbers say the sales. profit. he has his in the the performance of the other promoted track record. industry. How will they impact the future prospects? How will the funds raised be utilized? Will it additionally benefit the company? Is the money being raised for a new project. Read the risk factors very carefully especially those pertaining to the promoter/management. without any justifiable reasons? Also look at the performance of the group companies and the inter-company transaction within the group. look at the promoter’s background. investor complaints etc. Are the numbers in line with the similar companies in the industry? Is there any sudden improvement in the numbers just before the issue. it is important that the company has a track record of good operational performance.Thirdly. Are they paying reasonable interest? Is the loan likely to be repaid? Understand Future Prospects The future prospects of the Company and the industry would play an important role in the performance of the scrip on the stock exchange. Ensure that there are no dubious transactions. EPS etc. we are reasonably certain that the company money will not be deliberately misused or siphoned off to the detriment of the shareholders. Check for any serious litigation against the promoter or the company.

Buy value nor price. RIGHT ISSUE: When an existing company issues shares to its existing shareholders in proportion to is obligatory for a company where increase in subscribed capital is necessary after two the number of shares held by them. whichever is earlier. decisions and prevent you from ending-up holding a dud 6. Look At The Price Finally of course every product/scrip has a right price based on its’ fundamentals and industry prospects. there may not be much listing gain or loss. Issues which are overvalued such issues tend to quote below issue price over a period of time and it may be prudent to enter then. investing. thereby defeating your purpose of Look at the average industry PE and the companies’s EPS and try to estimate the fair price. it means the existing shareholders are selling a part of The amounts raised from the issue will not go to the Company. Equity Markets In India – An Overview 33 . it is known as Rights Issue. If the purpose of the issue is to list the company on the stock exchange and the 4 Ps are positive. Again look for fair valued or undervalued scrip. For follow-on issues the price is more or less known. their stake in the Company. Therefore. Compare this with the issue price to see if it is undervalued or overvalued.If its’ an offer-for-sale. Rights issue years of its formation or after one year of its first issue of shares. a high price is likely to reduce the prospects of appreciation at the exchange. A little time spent in reading the offer document and analyzing the IPO on the above factors will help you to make right investment stock. Even if the above 3 Ps were favorable. than at the IPO stage. the Company will not benefit from an offer for sale. then one can consider investing. Therefore.

only a listed company can make right issue. Rights issue can be made only in respect of fully paid up shares. Issue of bonus shares is generally an indication of higher future profits. No reservation is allowed for rights issue of fully or partly convertible debentures. Receipt of bonus shares as compared to cash dividend generally results in tax advantage to the shareholder. Equity Markets In India – An Overview 34 . Bonus shares are issued to the equity shareholders in proportion to their holdings of the equity share capital of the company. The company has to make the appointment Registrar but underwriting is optional. Accordingly. Issue of bonus shares results in conversion of the company's profits or reserves into share capital. A no complaints certificate is to be filed by the Lead Merchant Banker with the SEBI after 21 days from the date of issue of offer document. BONUS ISSUE: Bonus shares are the shares allotted by capitalization of the reserves or surplus of a company. Issue of bonus shares reduces the market price of the company's shares and keeps it within the reach of ordinary investors. Letter of offer should contain disclosures as per SEBI requirements. The company can retain earnings and satisfy the desire of the shareholders to receive dividend. 7. simply a capitalization of that portion of shareholders equity which is represented by reserves and surplus. A minimum subscription of 90 per cent of the issue should be received. It is Issue of bonus shares does not affect the total capital structure of the company. The issues of bonus shares are issued subject to certain rules and regulations. The company has to make an agreement with the depository for materialization of securities to be issued in demat form. it is capitalization of company's reserves. and maximum up to 60 days. It has also to appoint category I Merchant Bankers holding a certificate of registration issued by SEBI.SEBI has issued guidelines for issue of right shares. The company has to make announcement of rights issue and once the announcement is made it cannot be withdrawn. The rights issue should be open for minimum period of 30 days. Therefore.

Book-Building facility is available as an alternative to firm allotment. However in this system the issuer is not able to ascertain the price that the market may be willing to pay for the shares. This is a mechanism This method is also known as the price discovery on the basis of actual whereby the price is determined demand as evident form the offers given underwriters. BOOK-BUILDING: Companies generally raise capital through public issue. Since the issue price after the issue marketing there is flexibility in the issue size and the price of the shares. Book-Building method helps in evaluating the intrinsic worth of an instrument The company also gets firm to go or not to go for and the company's credibility in the eyes of the investor. The option of book building is available to all body corporate. In these cases companies decide the size of the issue and also the price at which the shares are to be offered to the investors. issue of any size was allowed since 1996.8. whereas in book investors are not involved in determining the determined on the basis of investor building pricing is feedback which assures investor demand. This is where book building can come to their aid. by the various institutional investors and the In the actual public offer process. method. However. before launching the issue. which are otherwise eligible to make issue of capital to the public. that can be reserved for firm allotment. The initial minimum size of issue through book-building process was fixed at Rs. offer price. on the basis of which it can decide whether Book-Building process also provides reliable allotment Equity Markets In India – An Overview 35 . commitments a particular issue of securities. 100 crores/-. A Company can opt for book-building process for the sale of securities to the extent of the percentage of the issue.

(2) Drafting of prospectus and getting approval from SEBI. The following stages are involved in the book-building process: (1) Appointment of book-runners. (11) Allotment of shares. (8) Filing copy of prospectus with registrar of companies. (3) Circulating draft prospectus. (4) Maintaining offer details. (7) Mandatory underwriting. of There is no price from the because the price is determined the basis bids received' investors. Equity Markets In India – An Overview 36 . (10) Collection of applications. (6) Bid analysis. (12) Payment schedule and listing of shares.procedure and manipulation quick listing of shares on the stock on exchanges. (9) Opening bank accounts for collection of application money. (5) Intimation of aggregate orders to the book-runner.

appointment of registrars for handling share applications and transfer. etc.5 carry out be issued. They have to to the work new issue such application determination of security mix drafting of prospectus. making arrangement for underwriting placement of shares. MERCHANT BANKERS: Merchant bankers carry out the work of underwriting and portfolio management. a net worth of Rs.INTERMEDIARIES IN PRIMARY MARKET 1. allotment letters. crores are allowed relating to to body corporate with merchant bankers. forms. They are required to get separate registration with Only work as category as I SEBI as Underwriting can be done without any additional registration. issue management portfolio managers. appointment of brokers and Equity Markets In India – An Overview 37 .

advisors and consultants and category IV merchant bankers can act only as advisers or consultants to a public issue. Merchant bankers have to fulfill the prescribed minimum capital adequacy norms in terms of net worth and they should have adequate and necessary infrastructure. an issuing company has to appoint bankers to collect money on behalf of the company. provides that the money on account of issue of shares and debentures should be collected through the banks. collect applications for shares and debentures along with application They money from investors in respect of issue of securities. Category III merchant bankers can act as underwriters.bankers to issue. 2. They get commission for their services. making publicity of the issue. They are also known as lead managers to an issue. 3. The underwriters are the institutions or agencies. which provide a commitment to take up the issue of securities in case the company fails to get full subscription from the public. 1956. UNDERWRITERS: The issuing company has merchant bankers or lead to appoint The underwriters in consultation important with the the manager. portfolio managers and co-managers. Therefore. Category II merchant bankers can act as consultants. underwriters play an role in development of the primary market. They should also employ experts having professional qualifications. BANKERS TO THE ISSUE: The bankers play an important role in the working of the primary market. Equity Markets In India – An Overview 38 . The Companies Act. investment companies’ commercial banks and term lending institutions. advisers. The underwriting services are provided by the brokers. A company is not authorized to collect the application money. They also refund the application money to the applicants to whom securities could not be allotted on behalf of the issuing company.

They also function as Depository Participants. competence and They have to obtain order to carry out the overall Equity Markets In India – An Overview 39 . There is an agreement between 1.4. share certificates and other documents related to the capital issues. The brokers integrity in should have an expert knowledge. Registrar and share transfer agents are of two categories. Share Transfer Agents are also intermediaries who carry out functions of maintaining records of holders for and on behalf of the company and of securities of the company matters related to transfer and handling all redemption of securities of the company. They assist in the subscription of issue by the public. canvassing and all other expenses relating to the subscription of the issue. Category I carry out the activities of both registrars to an issue and of share transfer agents. functions professional of an issue. Category II carries out the activity fielder of a registrar to an issue or as a share transfer agent.5 the brokers and the issuing case of company. refund orders. assisting the companies in determining the basis of allotment of securities as per stock exchange guidelines and in consultation with stock exchanges assist in the finalization of allotment of securities and processing and dispatching of allotment letters. REGISTRARS AND SHARES TRANSFER AGENTS: Registrar is an intermediary which carries out functions such as keeping a proper record of applications and money received from investors. The maximum brokerage rate is per cent of the capital raised in public issue and 0. The brokerage covers the cost of mailing. BROKERS TO AN ISSUE: Brokers are the middlemen who provide a vital connecting link between the prospective investors and the issuing company. Brokers get their commission from the issuing company according to the provisions of the Companies Act and rules and regulations. 5. appointment of brokers is not mandatory. However.5 per cent in case of private placement.

upon It is by companies. also known is called market. When the Securities Contracts (Regulation) Act was passed in 1956. There are three important stock Equity Markets In India – An Overview 40 . SECONDARY MARKET A market. is as It secondary is the base For the as stock which the primary market depending. India. The names and addresses of the brokers to the issue are disclosed in the prospects by the company help the investors to make a choice of the company for making their investments. The activities of buying and selling of securities in a market are carried out through the mechanism of stock exchange. efficient growth of the primary market a sound secondary market is an essential requirement. In which provide from the by investors. who provide nation wide trading facilities with terminals all over the country. Secondary market platform for purchase essentially comprises and sale of securities of stock exchanges.consent from the stock exchange to act as a broker to the issuing company. The secondary market offers an important facility of transfer of securities activities of securities. in recognized by the government. which deals in securities that have been already issued market. apart Regional Stock Exchanges established in different centers. organized stock exchange was established India at Bombay in 1887. The trading platform of stock exchanges is accessible only through brokers and trading of securities is confined only to stock exchanges. there are exchanges like the National Stock Exchange (NSE). only 7 stock exchanges were recognized. There are The first at present 24 Stock Exchanges in India.

The turnover ratio year 2003-04 accounted at 122. It is positively correlated sharply to on exchanges with the ability to 2003-04 against mobilize capital 28.689.5% in phenomenal increased 52. The all India market capitalization is estimated at Rs.953 million at the end of March 2004.809.3% in the previous growth The trading volumes decade.977 in million in 2002-03. million. has been increasing by leaps and bounds for the after the advent of screen based trading system by the NSE.9%. exchanges. 2003-04 fell substantially to Rs. market in India during the last 25 years. 13.093 the total 28. Equity Markets In India – An Overview 41 . There were 9.88% of turnover. trading system. The turnover ratio. The market capitalization ratio defined as the value of listed stocks divided by GDP is used as a measure of stock market size. the in 2000-01. which 9. There has been a substantial growth of capital Corporate Securities . The NSE yet again on all the market more 85% of total turnover (volumes while segments) in 2003-04. trading volumes on the year It registered a volume of Rs. The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange.368 trading members registered with SEBI as at end March 2004 (Table 1-10).900 million However. which offer screen based The trading system is connected using the VSAT technology from over 357 cities. which reflects the volume of trading in relation to the size of the market. over the past The trading volume. year. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade.There are 23 exchanges in the country.204. have been witnessing peaked at Rs.exchanges in Bombay namely the Bombay Stock Exchange. Top 5 stock exchanges accounted for 99. The increase in registered as turnover took place mostly at leader with the big exchanges. saw a turnaround 16. It is of economic significance since market and diversify risk.187. National Stock Exchange and over the Counter Exchange of India.

the most widely used indicator of the market. The movement of the S&P CNX Nifty.12% during 2003-04 (Table 1-11). The wherein it registered its all time return of Nifty was 80.65. changes the in the The index government’s economic policies. high in January 2004 of 2014. the increase in inflows. Equity Markets In India – An Overview 42 . However. presented in Chart 1-1. year 2003-04 witnessed a favorable movement in the Nifty. About ten exchanges reported nil trading volume during the year.14% for point-to-point 2003-04. is movement has FIIs been responding to etc.the rest 18 exchange for less than 0.

The share of WDM segment of NSE in total turnover for government securities decreased marginally from 52% in 2002-03 to 47. increased by manifold over a period of time. The aggregate trading in dated including treasury bills. securities. Equity Markets In India – An Overview 43 .6% in 2003-04.792. the share of WDM segment of NSE in the total of Non-repo government securities increased marginally from 74.Government Securities .090 million. 26.01% in 2002-03 to 74. During 2003-04 it reached a level of Rs.The trading in government securities exceeded the combined trading in equity segments central of and all the exchanges state government in the country during 2003-04.89% in 2003-04 (Table 110). However.

as a result of an inheritance) will buy securities. and investors with access to such information will want to buy the security.REASONS FOR TRANSITING IN SECONDARY MARKET There are two main reasons why individuals transact in the secondary market: 1. INFORMATION MOTIVATED REASONS: motivated investors believe that they have superior information about a Information particular security than other market participants. on the other hand.g. LIQUIDITY MOTIVATED REASONS: - Liquidity motivated investors. If the information is good. transact in the secondary market because they are currently in a position of either excess or insufficient liquidity. the security will be currently overpriced and such investors will want to sell their holdings of the security..g. this suggests that the security is currently under-priced.. where as investors with insufficient cash (e. Investors with surplus cash holdings (e. On the other hand. if the information is bad. 2. to purchase a Car) will sell securities. Equity Markets In India – An Overview 44 . This information leads them to believe that the security is not being correctly priced by the market.

3. LISTING Listing is a process involved in listing something with some one. the recognized stock exchange. 2. The listed shares appear on the official list of securities for the purpose of trading security listing is a step that is required to register and to place on record the security of a company with the appropriate authority i. To contribute to economic growth through allocation of funds to the most efficient channel through the process of disinvestments to reinvestment. It is a permission to quote shares and debentures officially on the trading floor of the stock exchange. To facilitate liquidity and marketability of the outstanding equity and debt instruments. the in the internal valuation return of the environment facilitates company-wide industry wide of capital and Such the measurement of the cost rate of economic entities at the micro level. To ensure a measure of safety and fair dealing to protect investors’ interest.e. To induce companies to improve performance since the market price at the stock exchanges reflects the performance and this market price is readily available to investors. valuation of securities and caused by changes factors). 4. Securities are required to be listed under Section 9 of the Securities Contract Equity Markets In India – An Overview 45 .FUNCTION OF THE SECONDARY MARKET 1. To provide instant (that is.

LISTING PROCEDURE: The listing procedure prescribed involves making a It simple is to be application by the company and payment of listing fees as by the respective stock exchange. Investors are able to know these price trends from such publications. of prospectus with stock the Registrar to of give approval and then make an The recognized exchange has agreement stating the terms and conditions. Only public companies are allowed to list their securities in the stock exchange. Registration and recording is done for the Equity Markets In India – An Overview 46 . All the issuers who framed list their securities have to satisfy the corporate at which the securities are governance requirement by regulators. The price trends in respect of unlisted securities are seldom known to the investors and the contract between the seller and buyer takes places mostly on one to one basis. The issuer wishing requirements prescribed in to have trading privileges statutes and for its in the securities satisfies listing of the the relevant listing regulations Exchange. Compared to listed securities the trading of unlisted securities is difficult. 1956. completed before the offer of securities to the public and registration Companies. The prices traded in the stock exchange are published in the newspapers. Thus. They shall first convert Articles of Association shall contain prohibitions as laid down in the listing agreement and as applicable to public limited companies. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis. facility. listing simply means the inclusion of any security for the Private Limited companies cannot get listing themselves into public limited companies and their purpose of trading in a recognized stock exchange.(Regulation) Act.

The company has to continue listing by paying renewal fees from time.e. company can The Central make an Government appeal to the Central grant Government within grant the a may either or refuse to permission for listing and the decision of the Central Government would be informed to the stock exchange concerned that shall act in conformity with such a decision. The authorities should intimate the company within 15 days with the reasons for refusal. which would accord approval. Again. Listing is mandatory for a public company. on which the securities steps to set up of a This approval would enable all are of the companies and Mutual Funds Equity Markets In India – An Overview 47 . These requirements defer from exchange to exchange. any failure to comply with the Section 21 of the Securities Contracts (Regulation) Act attracts penalty to the parties. the company may appeal to the SEBI who may either vary or set aside the decision of the stock exchange. which intends to offer its securities to the public by issue of prospectus and which wishes to provide facilities to the securities being offered to the public. CENTRAL LISTING AUTHORITY: The compliance with the listing requirements was being hitherto seen by each stock exchange on which the securities of the company are proposed to be listed. SEBI has initiated central listing authority. prescribed The period. the stock exchanges. The stock exchange is empowered to suspend or withdraw an admission to dealing in securities of company for breach opportunity of being or non-compliance heard in writing. with In the listing provision an eventuality where on giving an or any withdrawal suspension exceeds 3 months. illegal. Any allotment of securities made in the absence of listing or refusal of listing is held to be void i. The authority of the stock exchange may refuse listing of the securities of a company.purpose of trading by the registered members of the stock exchange and for the official quotation of the security price for the benefit of the public and time to the investors.

The central listing authority would ad as a check on the fly by night operators who float public issues. LISTING AGREEMENT: All companies seeking listing of their securities on the Exchange are required to enter into a listing agreement with the Exchange. INITIAL LISTING: If the shares or securities are to be listed for the first time by a company on a stock exchange is called initial listing. 1956. Equity Markets In India – An Overview 48 . to list the securities at an early date. The agreement specifies all the requirements to be continuously complied with by the issuer for continued listing. The Exchange monitors such compliance.going to be listed. if listing is to take place in a very requirements may be lenient. since the listing norms would be uniformly applied as against the current small practice where exchange the norms could where the be listing flouted. in addition to penalty under the Securities Contracts (Regulation) Act. Failure to comply with the requirements invites suspension of trading. TYPES OF LISTING Listing of securities falls under 5 groups – 1. The agreement is being increasingly used as a means to improve corporate governance. or withdrawal/delisting.

LISTING FOR PUBLIC ISSUE: When a company whose shares are listed on a stock exchange comes out with a public issue of securities. 4.2. such shares are also required to be listed on the concerned stock exchange. The stock exchange is a recognized stock exchange where the securities are listed for trading. it has to list such issue with the stock exchange. The company offers or issues the securities to the public through the issue of offer document like prospectus or a letter of offer. LISTING OF BONUS SHARES: Shares issued. AGREEMENT: Listing agreement is made between the respective stock exchange and the company. 3. LISTING FOR MERGER OR AMALGAMATION: When an amalgamated company issues new shares to the shareholders of the amalgamating company. Equity Markets In India – An Overview 49 . it has to list such rights issues on the concerned stock exchange. CHARACTERISTICS OF LISTING The following are the characteristics of listing of securities: 1. as a result of capitalization of profit through bonus issue shall list such issues also on the concerned stock exchange. 5. LISTING FOR RIGHTS ISSUE: When companies whose securities are listed on the stock exchange issue securities to existing shareholders on rights basis.

2. In addition. RESTRICTION: A company is free to have its securities listed in any number of stock exchanges. 4.2. The company gains national and international importance by share value quoted on stock exchanges. PURPOSE: The purpose of listing is to ensure free transferability of securities so as to facilitate clear transparency and open disclosure of information relating to the affairs of the company whose securities are listed. INVESTOR PROTECTION: Listing offers a measure of protection to the investors. It is a barometer of performance and continued good performance of the company. TO THE COMPANY: - 1. Equity Markets In India – An Overview 50 . 3. BENEFITS OF LISTING Listing of securities is beneficial to company as well as to investors: 1. The company enjoys concessions under Direct Tax Laws as such companies are known as companies in which public are substantially interested resulting in low rate of income tax payable by them. It is important that the securities are listed at least on the regional stock exchange. official quotation and liquidity in the trading of listed securities is also ensured.

liquidity of investment by the investors is well ensured. Equity Markets In India – An Overview 51 . there is no secrecy of the price realization of securities sold by the investors. Rights entitlement in respect of further issues can be disposed of in the market. Official quotations of the securities on the stock exchanges corroborate the valuation taken by the investors for the purpose of assessment under Income Tax Act. Takeover offers concerning the listed companies are to be announced to the public. Since the securities are officially traded. 5. Wealth Tax Act etc. Since securities are quoted. 5. The said details enable the investing public to appropriate financial results between the financial periods. 2. The rules of stock exchange protect the interest of the investors in respect of their holding. thus avoiding fears of easy takeover of 2. This will enable the investing public to exercise their discretion on such matters. Listed companies are obliged to furnish unaudited financial results on quarterly basis. helps the company to mobilize resources and the shareholders through without ' Right the Issue' for programs of expansion modernization depending on financial institutions in line with the government policies. 8. Listed securities are well preferred by the bankers for extending loan facilities. 4. 7. 4. TO THE INVESTORS: - 1. It ensures wide distribution of shareholding the organization by others. Financial It institution and banks extend term loan from facilities in the form of rupee currency and foreign currency loan.3. 3. 6.

8. 10. management of and reputation for the company by enjoying the confidence of the business prospects. Providing activities of quick transfer registration and company information. Listing is pattern and made through analysis of a company's provides capital structure. Hence. 2003 in the following manner: 1. 4. Easy evaluation of the real worth of securities. easy transfer. Tax incentives are available to listed securities. Provides an assurance of an existence of good faith or an absence of fraud with regard to the issue of securities. 5. Higher status investing public. assurance of genuineness securities. It safeguards general public interest by ensuring equitable allotment.OTHER BENEFITS 1. 7. and disclosure of proper information. 2. High collateral value for bank loans. DELISTING The securities listed can be de-listed from the Exchange as per the SEBI (Delisting of Securities) Guidelines. 6. 9. There is a safety in dealing of securities. 3. VOLUNTARY DE-LISTING OF COMPANIES: Any promoter or acquirer desirous of delisting securities of the company under the provisions of these guidelines shall obtain: - Equity Markets In India – An Overview 52 . Easy marketability and liquidity which also ensures easy rising of capital.

Comply with such other additional conditions as may be specified by the concerned stock exchanges from where securities are to be de-listed. and 4.1. 3. The prior approval of shareholders of the company by a special resolution passed at its general meeting. Make an application to the delisting exchange in the form specified by the exchange. COMPULSORY DE-LISTING OF COMPANIES: The stock exchanges may de-list companies which have been suspended for a minimum period of six months for non-compliance with the listing agreement. 2. Equity Markets In India – An Overview 53 . The stock exchanges have to give adequate and wide public notice through newspapers & also give a show cause notice to a company. 2. Any promoter of a company which desires to de-list from the stock exchange shall also determine an exit price for delisting of securities in accordance with the book building process. Make a public announcement in the manner provided in these guidelines. The exchange shall provide a time period of 15 days within which any person who may be aggrieved by the proposed delisting may make representation to the exchange.

This system enables specialization in the dealings and each jobber specializes in a certain group of securities. lower quotation for buying and higher one for selling.TRADING The act of buying and selling of securities on a stock exchange is known as Stock Exchange Trading. proposes to Every act as year a member has to decide and declare in advance whether he Jobbers is and brokers a dealer in are the two securities categories of dealers in an the stock agent or seller A jobber while a broker is a jobber or a broker. exchange. The difference between the two quotations is his remuneration. of securities. A jobber gives two quotations as a dealer in securities. It also ensures smooth and Equity Markets In India – An Overview 54 .

Broker has to negotiate terms and conditions of sale or purchase and safeguard his client's interest. that is fixed by the stock exchange. debentures etc in the physical form get converted into the electronic form and are stored in the computers by the depository. DEMAT: - Demat is “dematerialization” on shares. Dematerialization is a unique process of trading the shares in the electronic form rather then the vulnerability of the physical delivery of the shares. Dematerialization is a process by which the shares. Earlier there used to be the hectic procedure of physical delivery of shares. The double quotation of a jobber assures fair-trading in the market. He gets commission from his clients’. A broker is merely an agent to buy or sell on behalf of his clients. He is a generalist.prompt execution of transactions. Equity Markets In India – An Overview 55 .

Account if he is in banks possessing demat shares units will be (depository participants services). the shares will directly be transferred to the brokers A/c and he will get Equity Markets In India – An Overview 56 . the payment after the scripts have reached on the counter side. In this technological world things are needed to move at a faster pace. You can also expect a lower interest charge for loans taken against demat shares as compared to the interest for loan against physical shares. and with the introduction of dematerialization process the stock exchange has expanded its business at a tremendous speed. theft.5%. 4.25% to 1. you save 0. In case of transfer of electronic shares. buying the shares. 2. Easy liquidity Trading in demat segment benefits elimination of bad deliveries and all risks associated with physical certificate such as loss.The introduction of NEAT and BOLT has manifolds. increased the reach of capital market capital market has The cost and time spent by the The increase in number of investors participating in the increased the probability of being hit by a bad delivery. directly transferred into his A/c by the broker after the payment. ADVANTAGES OF DEMAT: - 1. 5. mutilation. and if he is selling the shares. This could result in a saving of about 0. You also avoid the cost of courier/ notarization/ the need for further follow-up with your broker for shares returned for company objection KNOW-HOW OF THE DEMAT ACCOUNT: - A person need to have a Demat so that. forgery. etc 3. brokers for rectification of these bad deliveries tends to be higher.5% in stamp duty.

in the NEAT system. It allows as for faster incorporation participants of price can see sensitive information the full market on prevailing prices. DP name is the bank’s name. to number of participants. This the market informational a large one increases efficiency and makes the market more transparent. cost and risk of error. irrespective of their improving the depth geographical and trade with liquidity of the market. name and Client an investor needs to submit his DP Id (depository participant’s Id). are executed only if the price match. which are orders to buy or sell shares at a stated quantity and stated price. buy and sell orders originating from all over the country. the system allows locations. DP Id to his broker. Further. This has resulted in a considerable reduction in time spent. Thus. resulting in improved operational into real efficiency. screen-based trading system. anonymous. The transaction is executed as soon as it finds a matching sale or buys order from a counter party. All the orders are electronically matched on a price/time priority basis. known as the National Exchange for Automated Trading (NEAT) system. time basis. which is similar to a passbook. Basically the holding of a Demat Account is similar to holding a Current Account in the bank. The DP without actually will maintain the account handling securities. This DP Id is the bank’s Id. The member inputs. order driven. the NEAT system provides an Open Electronic quantity conditions Equity Markets In India – An Overview 57 . on a real time basis. as well as frauds. TRADING PROCEDURE: NSE was the first stock exchange in the country to provide nation-wide. The book stores only limit orders. the of securities at which he desires to details of his order such as the quantities and prices transact.For this. A depository transfers securities as per the investor's instructions through the electronic mode. The DP will also give the investor a statement of holdings. another simultaneously. A single consolidated order book for each stock displays. and Client Id is the number given by the bank to the person who opens a demat A/c. balances of securities bought and sold by the investor from time to time.

which use WAP technology. who are mobile and want to trade from any place. but also from the personal computers of the investors through the Internet and from the hand-held devices through WAP. the transaction is executed also and the trading the confirmation directly on their PCs. investors get After these orders are matched. big or small.Consolidated Limit Order Book (OECLOB). provide brokers. provides equal access to all the investors. which ensures full anonymity by accepting orders. A perfect audit trail. This particularly helps those retail investors. SEBI has allowed the use of internet as an order routing system to the exchanges through the registered exchanges. The following exchange: are the steps involved in the trading of securities at a stock Equity Markets In India – An Overview 58 . The orders originating from the PCs 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. The trading platform of the CM segment of NSE is accessed not only from the computer terminals. Thus. which helps to resolve disputes by logging in the trade execution process in entirety. access to NSE obtain the permission became the first from their respective stock exchange in the country to investors to trade directly on the Exchange followed by BSE in March 2001. In web-based for communicating investors’ orders These brokers should February 2000. from members without revealing their identity. is also provided. NSE is the only exchange to provide access to its order book through the hand held devices. SEBI has allowed through wireless medium or Wireless Application Protocol (WAP) platform.

1. An order can be placed by certain telegram. Where the order is to be executed by the broker at the best price. quantity of securities. names of the parties. 4. Particulars such as price. The transfer deed contains is signed by the transferor (seller) and is authenticated broker. The broker may negotiate with 3. When the client does not fix any price limit or time limit on the execution of the order and relies on the judgement of the broker is called 'Open Order'. TRADE EXECUTION: The broker has to execute the order placed by his client during the trading hours. DELIVERIES AND CLEARING: Delivery of shares takes place through the instrument known as transfer deed. are entered in the contract note. telephone. 2. etc. The order is executed as per requirements of the other parties in order to execute the orders. PLACING ORDER: An order is to be placed by an investor with the broker either to buy or sale of number of securities at a certain specified price. and letter or in person. There are different types of orders. telex/ fax. stamp of the selling Delivery and payment may be completed after 14 days as specified at the time of negotiation. Delivery and clearing of security takes place through a clearance house. the broker prepares a contract note. When in the order the client places a limit on the price of the security it is called limit order. client. date of transaction. by a witness. It is the basis of the transaction. Equity Markets In India – An Overview 59 . CONTRACT NOTE: When the order is executed. It the details of the transferee. brokerage etc. such an order is called 'Best Rate Order'.

ICICI Web Trade. Fill in the client broker agreement on stamp paper. HOW TO TRADE ONLINE: 1. Margin Trading. Stock Holding Corporation of India and many other institutions have started the online trading system. Options and Futures Trading are also possible in this method. On the date of settlement the kind exchanged as per the delivery order. Register yourself as a client. Each broker settles the account with every client by taking delivery or giving delivery of securities certificates and receipts or payment of cheques. connection is required for this purpose. The settlement is done automatically with the program of the computer. A password is given to each investor who is secret. ONLINE TRADING: Online trading in shares and securities has already been started in India. Trading Account. It has been made possible due to introduction of demat. 3. and NSE during normal Investors can carry out buying and selling securities at BSE trading hours. Bank Account and Online three accounts opened into one place. HDFC Securities. The clearinghouse makes the payment and delivers the security certificates to the members on the payout day.5. Equity Markets In India – An Overview 60 . SETTLEMENT: The procedure adopted for the settlement of transactions varies depending upon cheques/ drafts and securities are of securities. Log on to the Broker's website. 2. There are Demat Account. The investors can carry out buying and Internet selling of securities while sitting in the house or office. The investors have to open an account with these institutions that provide online trading.

The broker's server will check the limit on-line and the demat account for the number of shares execute the trade. 10. REACH: The reach of online trading spans to all areas where internet connectivity is available. 9. through the hassles This enables the investor to cycles. The broker will send one e-mail confirmation and printed contract by mail. 5. Log on the broker's site using secure user ID and password. 6. with sufficient and relevant information on his stocks. trade in shares and without transfer going of tracking settlement writing cheques instructions. 2. Usually the order is executive in about 20 seconds and you get the confirmation.4. CONVENIENCE: The share broking account integrates with the investors banking. Equity Markets In India – An Overview 61 . broking and the share depository accounts. BENEFITS OF ONLINE TRADING: Online trading offers the investors the following benefits: 1. On the settlement day the demat and bank accounts will automatically get debited and credited. and chasing brokers for refund cheques. The market watch page shows real time data. 8. EMPOWERMENT: Since all decision-making is with the investor. 3. Trade shares directly by entering the symbol of securities. the investor is empowered to take decisions based on his own judgment. 7.

dematerialization fine-tuned risk management system. emergence information of clearing corporations to assume counterparty risk.e. wide geographical coverage. Equity Markets In India – An Overview 62 . in 1989. thereby having complete control over the trades. could not implement the G30 inadequate banking and depository infrastructure. In order to bring settlement efficiency and reduce settlement risk. trade. etc. i. SETTLEMENT: - The clearing and in Indian securities changes significant and settlement market has several mechanism witnessed innovations during the last decade.. CONTROL: With online trading. though electronic transfer of securities. due to multiple problems faced by the secondary market like the open out cry system. But in India.. the group of 30 had recommended that all secondary markets across the globe should adopt a rolling settlement cycle on T+3 basis by 1992. and shorter settlement cycle. SPEED: The speed of executing the transaction is more as compared to a phone-based 5. the trades should be settled by delivery of securities and payment of monies within three business days after the trade day. settlement India of securities in physical form. state-of-art These include use of the technology.4. many of these are yet to permeate the whole market. the investor can be assured of the execution of the transaction placed.

Clearing Corporation Houses of NSE and BSE respectively. trades are guaranteed by the National Clearing Corporation. Furthermore. it results in efficiency utilization of infrastructure and system capacity. rolling settlements were introduced in select scrips on a T+5 basis. the Indian equity market has reduced the settlement cycle to T+2 basis w. After successful implementation of rolling settlement on T+5 basis. (BOISL). 2003. In 1999. It also system of online position ensures the financial settlement of trades on the appointed day and time irrespective of default by members to deliver the required funds and/or securities with the help of a settlement guarantee fund. each exchange has a Settlement Guarantee Fund to meet with unpredictable situation. The main functions of Clearing Corporation are to work out: (a) What counterparties owe and (b) Why counterparties are due to receive on the settlement date. To carry the reforms further in this area.e. counterparty risk management of each and The Clearing Corporation member and guarantees an innovative method of the exchanges through a any the assumes settlement fine-tuned risk monitoring. 1 t April. The main advantage of this T+1 settlement cycle is that as the trades spread across all trading days.f. As the settlement is spread across evenly. SEBI moved the settlement to T+3 basis with effect from April 2002. In addition. which had got an effect from December 2001. Equity Markets In India – An Overview 63 . and Bank of India Shareholding Ltd. this reduces undue concentration of payment of monies and s delivery of securities on a single day. India Ltd. (NSCCL).recommendations within the stipulated time frame.

unless he or she holds a certificate of registration granted Equity Markets In India – An Overview 64 . 1992. However.ADVANTAGES OF ROLLING SETTLEMENT: In rolling settlement. sell or deal in securities. transfer of funds in India still takes two to three days. STOCK BROKER: A Stock Broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter in to a transaction. They get commission on these transactions. No stockbroker is allowed to buy. be introduced earlier because India did not Rolling settlement could not have depositories. in a rolling system. The National Stock Exchange was the first to introduce rolling settlement in the country. investors Thus. Rolling settlement and demat facilities in respect of necessarily requires electronic transfer of funds securities being traded. a stockbroker means a member of a recognized stock exchange. INTERMEDARIES IN SECONDARY MARKET: - 1. which facilitates trading and clearing large volumes on a daily basis. in the weekly settlement. The buyer and seller may be either a broker or a client. payments are quicker than For example. would receive the payments on the fifth day after the sale. According to Rule 2 (e) of SEBI (Stock-Brokers and Sub-Brokers) Rules. This is because handling large volumes of paper on a daily basis is extremely difficult for the clearinghouses of stock exchange. investors’ benefits from increased liquidity. About one fourth of the members of the stock exchange are specialist known as market makers. A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyer and the seller). It is only now that India has adequate facilities for electronic delivery of shares.

a A stockbroker shall not buy. and deal in securities. having a bearing on the benefits or rights accruing to the client. unless he or she holds a certificate of registration granted by SEBI. Maintaining and reconciling records of the services. sell. He acts on behalf of a stockbroker as an agent or otherwise for assisting the investors for buying. 3. No sub-broker is securities. and includes1. unless he holds certificate granted by SEBI. Keeping the client informed of the actions taken or to be taken by the issuer . sell. A sub-broker may take the form of a sole proprietorship. Collecting the benefits or rights accruing to the client in respect of securities.by SEBI. 3. a partnership firm or a company. allowed selling or dealing in to buy. He is also known as Remiseres. Stockbrokers of the recognized stock exchanges are permitted to transact with sub-brokers. 2. of securities. and 4. Custodial Services in relation to securities means safekeeping of securities of a client and providing services incidental thereto. Equity Markets In India – An Overvie w Maintaining accounts of securities of a client. CUSTODIAN: Custodian of Securities means any person who carries on or proposes to carry on the business of providing custodial services. or deal securities in through such stockbroker. 2. SUB BROKERS: A sub-broker is a person who intermediates between investors and stockbrokers.

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which other members wish to sell for their customers and sell odd lots which others. A jobber has to give two quotations as a dealer in securities.4. basis stock He is a localized dealer who handles transactions on a commission who act on behalf of their customers. Every year. want to buy. The double quotation of jobber assures fair-trading to investors. He ensures that the transactions are carried out smoothly and promptly. JOBBER: A jobber is a specialist and independent dealer in securities. Jobber deals only with the brokers and not with the investors. a member of the stock exchange has to decide and declare in advance whether he proposes to act as a jobber or a broker. The standard trading unit for listed stock is called ‘lot’. the minimum lot has become 1 due to dematerialization. He gives lower quotation for buying and higher quotation for selling the securities. Odd lot dealers buy odd lots. 5. The price of odd lots is determined by the round lot transactions. However. The margin is narrow when there is keen competition. TARANIWALA: A jobber who makes an orderly and continues auction in the stock market is called Taraniwala. 6. But all the listed stocks are not compulsorily in the demat form. 100 etc. The shares are normally traded in the lots of 5. His margin is fixed by competition among themselves as dealers. 50. Each jobber specializes in a certain group of securities. He trades in the for other brokers market even for small differences in price and helps to maintain liquidity in the stock market. The odd lot dealer earns his profit on the difference between the purchase and sales price. Equity Markets In India – An Overview 66 . ODD LOT DEALER: These are specialists who handle the odd lots.

Each custodian/clearing member is required to maintain a clearing pool account with the depositories. DEPOSITORIES: A depository is an entity where the securities of an investor are held in electronic form. Each transaction has to be separately negotiated. He carries out these transactions with a good centers at the same time. different centers of communication system and telephonic and tele-printer facility. Their role is restricted by the participation of LIC and Commercial Banks.7. Equity Markets In India – An Overview 67 . In case of a joint account. SECURITY DEALER: The members who purchase and sale government securities on the stock exchange are known as Security Dealers. 8. He should have ability to get the prices from different centers before other members trading in the stock market. ARBITRAGEUR: An arbitrageur is a specialist in dealing with securities in different stock exchange He makes the profit by difference in the prices prevailing in market activity. the account holders will be beneficiary holders of that joint account. Depositories help in the settlement of the dematerialized securities. The dealers should have information about the several kinds of government securities. They take risk in ready purchase and sale of securities for current requirements. The person who holds a demat account is a beneficiary owner. He is required to make available the required securities in the designated account on settlement day. 9.

as the case may be is a portfolio manager. to manage the Exchange. Any person who pursuant to a contract or arrangement with a client. He studies the market and adjusts the investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns there from. The Board then employees an executive officer. client whether as advises or directs or undertakes on manager or otherwise the behalf of the a discretionary portfolio management or administration of a portfolio of securities or the funds of the client. PORTFOLIO MANAGERS: A Portfolio Manager is a professional with experience and expertise in the field. which is chosen to represent the interests of seat holders. 11. The Exchange usually assigns a number of seats to brokers.10. Typically. Equity Markets In India – An Overview 68 . STOCK EXCHANGES: A stock exchange or securities exchange is a marketplace where stocks offered for sale are listed and exchanged. the exchange is made up of a Board of Governors generally selected by the members.

infrastructure for particularly the interest of small investors. It was given a legal status under the stock Exchange Reforms ordinance of 1992. trade practices. CONSTITUTION OF SEBI: The Central Section 3 Government has The head constituted a Board by the name of SEBI under in Mumbai. 1988 on the basis of the recommendations of the high-powered committee on the headed by G.SEBI (SECURITIES & EXCHANGE BOARD OF INDIA) Government of India set up the Securities and Exchange Board of India (SEBI) on April 12. It aimed at creating a proper and conducive environment required for the raising money from the capital market through rules. Patel. regulation. It also aimed at endeavoring to restore and safeguard the trust of the investors. facilitating automatic expansion growth jobbers. mutual funds and merchant bankers. investors and companies. and It has developed of business a proper of brokers. brokers. customs and relations among institutions. S. It was entrusted with a wide range of responsibilities in regulating the activities of almost all the players in the capital market. office of SEBI is offices at other places in India. Equity Markets In India – An Overview 69 . SEBI may establish of SEBI Act.

The general superintendence. sub-brokers. agents. FUNCTIONS OF SEBI: - SEBI has been obligated to protect the interests of the investors in securities and to promote and development of. be appointed by the Central Government. One member from amongst the officials of the Reserve Bank of India. Two members from amongst the officials of the Ministries of the Central Government dealing with Finance and administration of Companies Act. direction and management of the affairs of SEBI vests in a Board of Members. namely: 1. The Chairman and the other members are from amongst the standing who have shown capacity in dealing with A Chairman. 2. 4. which exercises all powers and do all acts and things which may be exercised or done by SEBI. shall be useful to SEBI. trustees of trust deeds. merchant Equity Markets In India – An Overview 70 . share transfer registrars to an issue.SEBI consists of the following members. finance. bankers to an issue. 3. economics. administration or in any other discipline which. and to regulate the securities market by such measures. in the opinion of the Central Government. accountancy. 5. (b) Registering and regulating the working of stock brokers. persons of ability. The measures referred to therein may provide for: (a) Regulating the business in stock exchanges and any other securities markets. 1956. Five other members of whom at least three shall be whole time members to integrity and problems relating to securities market or have special knowledge or experience of law. as it thinks fit.

custodians of securities. as may be delegated to it by the Central Government. conducting inquiries and audits of the stock exchanges. credit rating agencies and such other intermediaries as SEBI may. (j) Calling for information from. (f) Prohibiting fraudulent and unfair trade practices relating to securities markets. portfolio managers. (d) Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds. (c) Registering and regulating the working of the depositories. intermediaries and self-regulatory organizations in the securities market. (g) Promoting investors' education and training of intermediaries of securities markets. participants. investment advisers and such other intermediaries who may be associated with securities markets in any manner. (e) Promoting and regulating self-regulatory organizations. (k) Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central. (h) Prohibiting insider trading in securities. specify in this behalf. undertaking inspection. State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board. Equity Markets In India – An Overview 71 . foreign institutional investors. (i) Regulating substantial acquisition of shares and take-over of companies.bankers. by notification. mutual funds. other persons associated with the securities market. (l) Performing such functions and exercising according to Securities Contracts (Regulation) Act. 1956. underwriters.

(b) Promoting the development of the securities market. Major part of the liberalization process was the repeal of the Capital Issues (Control) Act. 1947. effective regulation market. SEBI Act. to ensure the market was allowed of the to allocate resources competing uses. With this. ceased. This was one of the reasons why SEBI was created. (p) Performing such other functions as may be prescribed. (n) Conducting research for the above purposes. 2. 1992 was enacted to establish SEBI with statutory powers for: (a) Protecting the interests of investors in securities. Delay in receipt of share and debenture certificates after allotment. and the office which to administered the Act was abolished. Delay in receipt of dividend and / or interest warrants. in May 1992. The investor today can look forward to redress of his grievances through SEBI. and Equity Markets In India – An Overview 72 . considered necessary by it for the efficient such discharge of its INVESTORS: The investors in the past have suffered at the hands of insufficient stock exchanges and greedy unprofessional brokers. 4. fixing of premium and rates of interest on debentures etc. Delays in refund of application money.(m) Levying fees or other charges for carrying out the purpose of this section. information as may be functions. as may be specified by SEBI. pricing of the issues. However. Delay in receiving the maturity value of fixed deposits or debentures on redemption. Government’s control over issues of capital. 3. Normally investors have complaints of following nature: 1. (o) Calling from or furnishing to any such agencies.

if not prohibited may be issued. SEBI has many such from complaints regularly and up tries to redress all such the time to time pulled companies against whom complaints are received and has also initiated action against the defaulting SEBI has encouraged the registration of investors associations in companies. The ban on BadIa. SEBI may. 2. any offer document. SEBI receives grievances. Equity Markets In India – An Overview 73 . by general or special orders. 6. The method of postal ballots so that small investors views are heard. The introduction of screen based trading. 5. transfer of securities and other matters advertisement soliciting money from the public for the issue of securities. specify.(c) Regulating the securities market. a) the matters relating to incidental thereto. specify the conditions subject to which the prospectus. such offer document or advertisement. and b) the manner in which such matters. shall be disclosed by the companies and 2. 4. for the protection of investors. The book building process in buy-back of shares by the companies. by regulations. various parts of the country to organize investors into an effective force for protection of their own interests. or issue of capital. Some of the actions taken by SEBI can be summarized as below: 1. The capital adequacy norms for brokers. The dematerialization of shares. 3. 1. a) prohibit any company from issuing of prospectus.

Cross-border investing develops classes with very low correlation to the domestic holdings. a FIl is an institution established or incorporated outside India. As per the definition of RBI. Capital International. The big names include Morgan Stanley. in turn. Warburg. The FIls are subject to stringent monitoring. Templeton. theory has led an to an increasing a across India being emerging economy with Such capital market foreign investments have been a regular feature here. trend of FII investments at its peak. investments flood in a country with sound macroeconomic and operational procedures in place. and JFAM. CDC.FIIs & INDIAN EQUITY MARKET Investors worldwide tend to stay away from undertaking international asset investments. India originated in 1993 and the net investment FIls of different countries. But the fact is.20 million. mainly the US. Such institutions have been permitted to invest in Indian securities markets starting from September 1992 when the then authorities issued suitable guidelines. The number of FIls in India has grown over the year to nearly 500. They are required to register with RBI and the SEBI before they commence their operations. which proposes to make investments in Indian securities. by avoiding cross country investment. but what is the key to attracting a substantial slice of the cake and how can we sustain the pace? The era of FIls investments in during the year was $827. started operating in India. This premise of investment the globe. Equity Markets In India – An Overview 74 . contributing to a lesser volatility for investments. Steps taken by India in these fronts have been commendable. investors are actually causing the rise in the risk of their portfolios.

Although the investments have provided with the much needed liquidity and depth in the markets. the FIls have emerged as a masculine unit in recent times. FIls support the markets by unlocking their chests and rejuvenating the secondary markets. as a surprise From the Central Bank's investments impart confidence to the economy by providing cushion in the form of forex reserves. Equity Markets In India – An Overview 75 . creating new jobs and triggering all positive things that come point of view. Performance of the secondary market brings cheer to the new issues market thus allowing companies to raise fresh capital. has to be treated cautiously. The authority of these institutions is evident from the very fact that by the mere news of their arrival it is sufficient for the market to supplement itself with a double-digit growth. The clout of the FIls is such that the market players anticipate their arrival with breathless anxiety. a healthy FII activity helps fund new projects and expansions. Truly. flows are notoriously volatile compared to other forms of capital flows. gift. prudent enough in enforcing strict guidelines for FIls entering India and controlling the repatriation of the investment. FIls have been blamed for exacerbating small withdrawals at economic problems in a country by making large and However. As evident. FIls. This trend of Indian equity markets to that of FIIs investment though encouraging.Foreign Institutional Investors (FIls) during the last one-decade have become an integral part of Indian equity markets. RBI and SEBI has been concerted the first sign of economic weakness. Portfolio as FIls usually pull back portfolio investments at the slightest hint of trouble in the host country often leading to disastrous consequences to its economy. the role played by the fly-by-night operators in creating panic is some of the Asian economies do Indian markets face a risk. This reputation of the FIls is a well-earned status. They have been an incredible source of money ever since.

credentials can ignite a government ownership in various segments. Also. and Dr. Infosys. CHALLENGES FACING FIIs IN INDIA: - 1. with their size and business Equity Markets In India – An Overview 76 . companies like Ranbaxy. China. State Road Transport Corporations. Reddy's have given consistently excellent performance over the years and this has encouraged FIls to invest in the stocks of these companies down is which holds a major weightage in approach as sensex.Ever since they entered India in 1993. across top the preferred their portfolios consist of securities many markets. While in developed economies this ratio is to the extent of 120%. MARKET CAPITALIZATION TO GDP RATIO:The second major concern is market-cap to GDP ratio in India. while it is in the range of 11 to 27% for countries including China. investors to take significant positions. For example. Indian markets are concentrated in very few stocks in terms of volumes turnover. India Posts. which is quite low at 32%. For global fund managers. RIL. promoters' holdings are high which hampers 2. Taiwan and Korea. the market has moved nowhere between 1993 and now. Despite an over burdened economy and infrastructure bottlenecks. CONCENTRATION AND LIQUIDITY:The biggest concern plaguing Indian markets is that of concentration and There are only a handful of stocks that have the kind of liquidity for foreign liquidity. The share of top 10 most active index stocks in turnover is about 57% in India markets. Thailand. HLL. HDFC. liquidity. This is because of increased Indian Railways. This implies that only a small fraction of Indian business is captured in stock markets and some of the major businesses are not even available for investing. Asian countries like Hong Kong. which make it too cumbersome to follow a bottom-up strategy in each market. Korea and Taiwan have a ratio of more than 50%.

lot of investor interest. opportunities will be limited. Unlike domestic fund managers who feel reasonably confident because of their investors do feel quite insecure. MACRO-ECONOMIC PARAMETERS:Selection of the right country is the main objective for FIls investments rather than stitching together sector themes. much more favorably. the quantum of investment in Indian companies may not really justify the costs of monitoring them on a regular basis. FIIs are paying more attention than ever to countryspecific factors ratios. though local fund managers are more bothered about ground realities such as corporate profitability and growth prospects. TJ>ere are major private players. which are closely held and unless all these come into the stock market fold. the US regulatory corporate governance standards. CORPORATE GOVERNANCE AND DISCLOSURE NORMS:There are concerns on the corporate global investors governance standards have more faith in as well. 3. UTI and IFCI will effect the fiscal situation. foreign For a fund manager managing funds from his headquarters in the US. Despite accounting scandals system and in the US. regular interaction with the management. Stocks trading at PE multiple of 2 or 3 in spite of their steady financial performance raises suspicion about the quality of management and in this respect global investors look at emerging markets like Korea and Taiwan. like reform momentum. The global rating agency Standard & Poor downgraded India's local currency rating to junk grade from investment grade 1S definitely worrying global investors. Equity Markets In India – An Overview 77 . 4. local political situation and macro-economic Macro-economic stability and fiscal stability are basic hygiene factors to attract The cost of rescuing government-owned financial institutions such as foreign investors.

A majority of this was received in the later part of the year. Inflows from FIIs stood at US$ 17 billion in 2007. The surge on the Indian stock markets was powered by foreign institutional investors (FIIs). The main reason was the cutting of rates by the US Federal Reserve. Fortunately. If they fall steeper from the current levels. it could revive the auto sector and boost the profitability of the banking sector. particularly on India is more of an internal-consumption-driven too. economy. economy is none to strong. Also. particularly PSU banks. remain consistent or surge? With large global investment banking entities reporting poor results of late. These factors provide strong support for sustained acceleration in the domestic economy. but is ending on a mixed note.222. With the US market heading for a recession and the global economy for a slowdown. have surged. the cream of growth has been investment-driven. FII inflows are bound to reduce from such entities for now. through surge in investment income. Domestic inflation has moderated and is below 4%.1 points in six consecutive trading sessions between 14 and 21 January 2008. 2008 has begun with a bang. its export prospects. Crude prices so have many agri and other commodity prices at a time when the global This will definitely have an impact on India. The US sub prime crisis is far from over. And how! The Bombay Stock Exchange (BSE) Sensitive Index (Sensex) shaved off 3. which shows no signs of easing. This has led to a surge in forex inflows into emerging markets like India and into commodities. will foreign portfolio investment decline. Though the fall was continuous on each of these days. India is also witnessing one of the lengthiest capital expenditure cycles.2007 A YEAR TO REMEMBER Year 2007 started on a strong note. In the past few years. This experience has helped the domestic players to strengthen their overseas businesses as well. and can drag the US economy into recession. The US Federal Reserve has cut rates thrice. interest rates have already peaked. 21 January turned to be a typical Black Monday as the market went down intra-day by Equity Markets In India – An Overview 78 .

062. After closing at a historical high of 20. Sub-prime crisis is just a symptom of the weaknesses in the US economy. Norway.291 points.2. The carnage was in dollar terms.29 on 28 March 2008. Fortunately. Thirty.000 levels to 16.207 points on 10 January 2008 and then crashed like a pack of card on fears of a US recession and huge write-offs by almost all global banks and financial institutions on account of defaults in the sub-prime mortgage market. & Poor’s/Citigroup These were Morocco. A US recession will slow down the global economy due to its global linkages. Poland.2% in dollar terms in this period. India lost 16.371. Iceland and Turkey — witnessed over 20% fall. the markets are now suffering from excessive FII selling. Still the market is nearly 22% lower from its peak. the BSE Sensex tumbled by over 29% to 14.33 on 8 January 2008.49 on 17 March 2008. This took a heavy toll on the Indian markets also. while six markets witnessed single-digit decline. Brazil. six markets — Luxembourg.35 points off. Jordan and Nigeria. In the year to 21 January 2008. the index shot up to a historic high of 21.408. On the other extreme. finally closing with 1. only three of the 52 equity markets Index provided gave positive returns by Standard according to Equity Indices. there was a relief rally. which talked up the Sensex past the 16.809. From excessive inflows.873. Global not unique to the Broad India but was spread across the globe. It is becoming increasingly clear that the global economy is set to slow down. Starting the December 2007 quarter at a level of 17. the BSE Sensex kept on rising (with many corrections) throughout the quarter and was up over 17% at the end of the quarter. When the December 2007 quarter results started pouring in. Nevertheless. There was sustained and heavy selling by foreign institutional investors (FIIs) in January 2007 as well as in February till date.2 global Market points.seven markets had a double-digit dip. the Indian markets have managed Equity Markets In India – An Overview 79 .

Somewhere a market is reeling under the impact of events unfolding in another part of the globe. If an aggressive investor such as Bear Stearns. Despite the trading instruments one end to cushion risks. investors are either availability of sophisticated propelled stemming on euphoria emanating at another. Not any more. Lessons From Recent Meltdown Investors realize how lonely they are during a market meltdown.to fare much better compared with other markets on good inflows from domestic institutional investors. Innovations in dissemination of information ensure that the markets never sleep. some: Equity Markets In India – An Overview 80 . Here are were as clueless as they were? Each crisis brings to the table its own lessons. collectively determine the course of the markets. class. Merrill Lynch and other blue-chip US investment banks were writing off huge amounts of their exposure to paper backed by sub prime mortgages. or swept went aside on a wave of pessimism the conventional wisdom. how are retail investors to know that the chattering propounding the theory of ‘decoupling’ of emerging markets such as India and China even as Citigroup. could not allegedly sitting on a pile of cash just 100 hours before its hasty foresee its fate. from Institutional investors. rescue.

Even a stock available at a deep Equity Markets In India – An Overview 81 . valuation becomes a relative term market as liquidity chases can sound stocks. Slowdown in capital inflows could hamper the expansion plans of Indian companies and in turn slow the growth rate further. monetary authorities have to calibrate their responses keeping in mind not only local conditions but also the international environment.Moody markets: If the US Federal Reserve has the power to boost markets around the world by cutting its lending rates. Valuation mirage: When the markets are buzzing. Yet. Though considerably less than the average 9% recorded in FY 2007. The picture changes when the situation reverses. why should the bursting of the US housing bubble pull down India’s stock market? The bottom line: there is no predicting what could please or upset the markets. money regulators are in the danger of losing their autonomy. preoccupied by the credit crunch back home. why should domestic policies such as the Left parties’ threat to torpedo the Indo-US nuclear deal and increase in short-term capital gain tax from 1 April 2008 still stun the market? If domestic consumption is driving the economies of emerging markets. In the process. it is an attractive rate and comparable with other emerging economies. The Bear Stearns bailout and the efforts of the Union Budget 2008-09 to cap foreign portfolio investment to blunt inflation indicate central banks and central governments have to increasingly coordinate policies with each other. foreign funds have turned net sellers. Sometimes even a richly priced players with IPO in a hot re-rate the entire sector comprising established better track records. The crux is success of reforms hinge on liquidity. Money moves: As funds flow from markets with low interest rates to those with high interest rates. Liquidity liability: India’s economy is expected to clock about 8% growth in the fiscal ending March 2009. The positive fallout is balanced monetary and fiscal policies.

banks complex. Raw materials operations of Indian companies are from one continent. turning more another. Race to riches: More competition means companies have to not only protect and increase market downs shares but reward investment shareholders banks with higher return. Risk factors: As the markets become global.000 level of the Sensex appears expensive in view of the uncertainty. Equity Markets In India – An Overview 82 . Many companies raised the cap on foreign holdings to earn better valuation. can insulate from Newsources of in foreign exchange fluctuations generation stability. Many of these companies are blaming for mis-selling derivatives products in huge that were suppose to black holes in thus. The logic with good was that foreign funds would track records or with credible companies financial promoters empowered to tap future potential. Fatal attraction: Till recently. transform into hedge against volatility. vehicles but may result to the balance sheets. collapse of the US property market shows that in the race to the top even the sturdiest companies can throw caution to the wind. processed in are sourced and the finished product sold in a third. Seven years after the end of the dot-com era. holdings by overseas investors were taken as a measure to gauge the soundness invest in only those of the stock. The flip side is an equally quick slump in prices if foreign investors pull out on panic.discount at the 15. The recent write- by leading global have unearthed their reckless the exposure to exotic derivatives to maximize profit.000 level compared with the 20.

ban of the badla system. has revolutionized the NSE is the only stock exchange which covers majority equity Also equity capital market encourages capital formation in the country. and introduction of rolling settlement have facilitated quick trading and settlements which lead to larger volumes. which influences equity market. the Indian Equity Market is one of the most technologically developed in the world and is on par with other developed markets abroad. dematerialization. Today. for corporate enterprises and short permanent source of long term finance The investors. desire to share the risk. The setting up of the National Stock Exchange of India Limited face of the stock market.CONCLUSION Equity capital is a high risk-high reward. investments every day. The specific factor. who term earning for shareholders. return and control associated with ownership of companies would invest in equity capital. is the investor’s sentiment towards the stock market as a whole. So investor first has to analyze and invest and not speculate in shares. The introduction of online trading has given a much-needed impetus to the Indian Equity Markets In India – An Overview 83 . The introduction of on-line trading system.

equity markets. So to increase the volume of equity investment. These stock exchanges will have to plan strategic tie-ups with their foreign counterparts to get an international platform. and with the introduction of METHODS exchange OF MARKETING has expanded its SECURITIES business at IN THE EQUITY MARKET. to encourage Indian investment and face international competition every Indian stock exchange has to stress on innovation and sustained investment in technology to remain ahead. must based And disregards upon also chart the emotional formations. (up and down the research in sale and states purchase. Equity Markets In India – An Overview 84 . speed. A developed and vibrant secondary market can be an engine for the revival and growth of the primary market. which an investor wishes to buy) among the investors to avoid the irregularities while trading. component assuming that of of trading by making investors prices reflect both facts and by creating the awareness fundamental analysis (Fundamental analysis is a method of finding out the future price of a stock. and take steps to increase investor confidence. So. provide more value-added services to investors. In this technological world things are needed to move at a faster pace. So. the stock exchanges should strive to increase transparency. the stock a tremendous According to irregularities of market economic times. the stock exchanges decisions emotion. strictly enforce corporate governance norms. the major reason behind the price of share) is mainly because of FORECASTING MIND SET OF EQUITY INVESTORS.

3. 7.hdfcsec.equitymaster.BIBLIOGRAPHY Books Referred 1.bseindia. 6. Magazines 1.com www.sebi. 2.com Equity Markets In India – An Overview 85 .nseindia.financialexpress. 3.com www.com www. 2.gov. 4. www.in www. 2. 5. 4. Investment Management-Preeti Singh Indian Financial Market-T R Venkatesh Financial Market-P K Bandgar Merchant Banking & Financial Services-Anil Agashe. Business Today India Today Business World Websites 1.com www.indiainfoline.com www. 3.

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