PROJECT REPORT ON

“CAPITAL MARKET”

SUBMITTED TO: SUBMITTED BY:

POOJA M. KOHLI NEZAMUDDIN

EXECUTIVE DIRECTOR MBA(IC) 2 nd YEAR

LUDHIANA STOCK EXCHANGE ROLL NO: 629

(Session 2011 – 2016)

University School of Business Studies

Punjabi University, Patiala

Talwandi Sabo, Bathinda

ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all our friends and seniors who
helped and guide me to complete this project successfully. I am highly grateful and indebted to
my project guide Mr. Sadhu Ram (guide & co-coordinator) and for their excellent and expert
guidance in helping us in completion of project report.

Nezamuddin
PREFACE

The successful completion of this project was a unique experience for me because by visiting
many place and interacting various person, I achieved a better knowledge about this project.
The experience which I gained by doing this project was essential at this turning point of my
carrier this project is being submitted which content detailed analyst of the research under
taken by me.

The research provides an opportunity to the student to devote her skills knowledge and
competencies required during the technical session.

The research is on the topic “capital market”

 Contents
 Introduction to Ludhiana stock exchange
 Organization of LSE
 Management of LSE
 Strengths of LSE
 Investors related services
 Educational initiatives of exchange
 Listing of securities of companies at LSE
 CAPITAL MARKET
 Introduction and definition
 Advantages of capital market
 Disadvantages of capital market
 Function of capital market
 Role of capital market in an economy
 The importance of C.M for the economic development of India
 Significance of capital market
 The importance of C.M in economy
 C.M: Components and functions
 Capital market instruments
 Primary market
 Secondary market
 Activities in the primary market
 How does Primary Market works?
 Types of issues
 Secondary market
 Activities in the secondary market
 Major entities involved in the C.M
 Secondary market & it’s operations
 STOCK EXCHANGE
 History and function of stock exchange
 The stock exchanges
 Member of the stock exchange
 Settlement cycle
 LEGAL FRAMEWORK
 SEBI(intermediaries) Regulation,2008
 SEBI Regulations, 1992
Welcome to LSE Securities Limited

LSE Securities Ltd., was incorporated in 07TH January, 2000 with a view to revive the capital
market in the region and for taking full advantage of the emerging opportunities being provided
by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has
marched forward rapidly and has maintained consistent growth record.
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange has presence at various
locations to effectively service its large base of individual clients. The clients of the company
greatly benefit from strong research capability, which encompasses fundamentals as well as
technicals of LSE Securities Ltd, besides its wide reach in this part of the country.
LSE SECURITIES LIMITED (LSESL) is a subsidiary of the Ludhiana Stock Exchange Limited under
the policy formulated by the Securities and Exchange Board of India (SEBI) for “Revival of Small
Stock Exchanges. The policy enunciated by the SEBI permits a stock exchange to float a
subsidiary, which can take up membership of larger stock exchanges, such as the National Stock
Exchange of India Ltd. (NSE), and Bombay Stock Exchange Ltd. (BSE). LSESL has been registered
by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and Futures &
Options segment of NSE and Capital Market segment of BSE and Trading member of MCX-Stock
Exchange Limited. Trading Members of LSE can access NSE and BSE by registering themselves
with SEBI as Sub-brokers of LSESL.

Organization
1. OBJECTIVES OF THE COMPANY
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which was formed with
an objective to enhance business and investment opportunities for the investors and
members of Ludhiana Stock Exchange at large, through innovative products by encompassing
a variety of activities related to the capital market. The company has a paid-up capital of Rs
5.55 crores.

2. INTRODUCTION OF THE LSE SECURITIES LTD.

LSE Securities Ltd., was incorporated in January, 2000 with a view to revive the capital market
in the region and for taking full advantage of the emerging opportunities being provided by
expansion of bigger stock exchanges like NSE and BSE. The company since its inception has
marched forward rapidly and achieved many milestones in a short span of existence.
3. GOVERNING COUNCIL
The Council of the management of the Company comprises of 10 directors of which 3are
broker members and 7non-brokers. Five non broker members are Independent Directors of
eminent status from the field of finance, law and management and remaining two are Chief
Executive Officer of LSE Securities Limited and Executive Director of the holding company
(Ludhiana Stock Exchange), who are on the Board of the company as ex-officio Directors. Thus
the council of management has representation of sub-brokers as well as professionals and
subject specialists representing various fields of business activities. Operations of the
company are run in a professional, transparent and fair manner keeping in view of the
interest of investors as well as other stake-holders.

4. CORPORATE MEMBERSHIP OF NSE & BSE

SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock
Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its
subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights
on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the
first half of year 2000.

5. TRADING AT NSE AND BSE

The LSE Securities Ltd. commenced trading operations in Capital Market Segments of BSE and
NSE in September, 2000 and December 2000 respectively. The turnover of the Company at
NSE and BSE is growing by leaps and bounds ever since in incorporation. There was
encouraging response from the sub-brokers specially at NSE counters.During the financial
year 2005-06, the Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in
"Capital Market" segments of NSE and BSE respectively. For the year ended 2005-2006, there
were 128 sub-brokers registered for NSE and 68 for BSE.

6. F&O SEGMENT OF NSE

The LSE Securities Ltd. commenced trading operations in Future and Options Segment of NSE
in February 2002. The Company became the first subsidiary of any Regional Stock Exchange
which commenced trading in “F&O” Segment of NSE. Response to trading facilities in the
“F&O” segment of NSE has been very encouraging and volumes generated in this segment
soon exceeded those in “Capital Market” segment.

7. TRADING THROUGH V-SATS

The LSE Securities Limited has provided facility to its sub-brokers for trading on NSE and BSE
through VSAT counters which are located outside Stock Exchange Building. During 2005-2006,
27 sub-brokers of the company have been trading through VSAT on NSE and 13 on BSE.

8.CERTIFICATION IN FINANCIAL MARKET

In order to provide professional services to the investors of LSE Securities Limited through its
sub-brokers, the company motivated its sub-brokers and its staff to qualify the certification in
financial markets conducted by NSE. All trading terminals for Capital Market Segment and
F&O segment are being operated by the persons after having qualified the said certification

9. DEPOSITORY PARTICIPANT SERVICES – NATIONAL SECURITIES DEPOSITORY LIMITED

(NSDL)
The LSE Securities Ltd. commenced its operations as Depository Participant of NSDL in August
2000. The DP services provided by the Company have technology edge over other DPs, as DP
of the company is the only On-line Real-Time DP in the region. As a result of efficient services
and competitive rates, the Company has been able to increase its market share in the DP
business at the cost of other DPs in the region. As on date DP of NSDL and CDSL of the
Company at Ludhiana is servicing over 35000 beneficiary accounts.

10. DEPOSITORY PARTICIPANT SERVICES – CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED

(CDSL)
In order to further strengthen its services to sub-brokers and investors, the Company applied
for the DP of CDSL. It started DP operations of CDSL in December 2001. With the
operationalisation of DP Services of CDSL, the Company has been able to provide delivery of
shares to sub-brokers and investors on the day of pay-out which in turn helps the sub-brokers
to give timely deliveries to their clients. Introduction of CDSL operations has also enabled the
sub-brokers and investors of the Company to timely meet the pay-in obligations of securities
purchased by the investors on BSE and sold next day on NSE through the Company and vice-
versa.

11.EXPANSION PROJECTS
To increase its presence in the region further, the company plans to open its branches of
Depository Services in the major cities of the region. To start with, it has already opened its
branches at Jalandhar, Amritsar and Chandigarh.

Management
The management of the Company comprises of 12 directors of which 5 are member directors
and 5 Public Representatives being persons of eminent status from the field of finance, law
and management, who are nominated by Ludhiana Stock Exchange after approval of their
name from SEBI. Besides the Chief Executive Officer of company and Executive Director of the
holding company (Ludhiana Stock Exchange) are on the Board of the company as ex-officio
Directors. Operations of the company are run in a professional, transparent and fair manner
keeping in view the interest of investors as well as other stake-holders.

STRENGTHS OF LSE
 “LSE” brand is popular among masses.
  We have requisite infrastructure for the capital market activities which includes a
multistoried, centrally air conditioned building situated in the financial hub of the
cities i.e. feroze Gandhi market.
 We have well experienced staff handling operations of stock exchange.
 We have competent board and professional management.
 We have much needed networking of sub brokers in the entire regions, who are
having rich experience in stock exchange operations for the last thirty one years.
 We have more than forty six thousands clients spread across Punjab, Himachal
Pradesh, Jammu & Kashmir and adjoining areas of Haryana and Rajasthan.
 The turnover of our subsidiary is the highest amongst all subsidiaries of regional stock
exchanges in India.

INVESTORS RELATED SERVICES

The exchange has been providing a variety of services for the benefits of the investing public.
The services include investors service centers, investors protection fund and investor
educational seminar.
1. Investors service centers:
The exchange has setup investor’s service centers at lse building for providing information
relating to capital market to the general public. The centers subscribe to leading economic,
financial dailies and periodicals. They also stored the annual reports of the company listed at
the stock exchange. The investor’s service centers are also equipped with a terminal foe
providing “live” rates of trading at NSE and BSE.
A large number of investors visit the centers to utilize the services being provided by the
exchange.
2. INVESTORS AWARENESS SEMINARS:
The exchange has been organizing investors’ awareness seminars for the benefit of the
investors of the region comprising state of Punjab, Himachal Pradesh, Jammu & Kashmir,
Chandigarh and adjoining areas of Haryana and Rajasthan. This massive exercise of organizing
investor awareness seminars has been launched as a part of securities market awareness
campaign launched by SEBI in January, 2003. The exchange apprises the investors about do’s
and don’ts to be observed while dealing in securities market. During 2011 to 2012, till date,
exchange has organized more than 83 workshops in the region mentioned above.
3. WEBSITE OF THE EXCHANGE:
www.lse.co.in the exchange has it’s on website with the domain name www.lse.co.in. The
website provides valuable information about the latest market commentary, research report
about company, daily status of international market, is separate module for internet trading,
information about listed companies and brokers and sub brokers of the exchange and it’s
subsidiary. The website also contain many useful links on portfolio management, investors
education, frequently asked questions about various topics relating to primary and secondary
market, information about mutual funds, financials of the company including quarterly
results, share prices, profit and loss accounts, balance sheet and many more. The websites
also contains daily technical charts of various scrip’s being traded in BSE and NSE.
EDUCATIONAL INITIATIVES OF EXCHANGE

LSE has carved out it’s unique position among the stock exchanges of the country for the
knowledge management. It has set up an education and training cell and the same has
emerged as a leading facility in various financial services in India. The exchange has been
conducting a unique certification programme in capital market in a association with center for
industry institute partnership programme Punjab university, Chandigarh for the last three
years. This programme has widened the horizons of participant’s vis-à-vis capital market
operations as practical skills based knowledge is provided by stock brokers, stock exchange
officials, professors of finance and business management and above all professionals working
in different areas of capital market. We have completed
Series of batches of this programme and we now want to scale up this programme and are
planning to launch various other programmes on areas relating to securities market. We have
edge over others as far as educational training in financial services is concerned due to
following factors:

I. Directly connected with the industry as regional stock exchanges.

II. Connected with the large base of investors as they use the stock exchange as a
trading platform for their liquidity needs.
III. Presence in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and
Chandigarh through our branches network and the area being under the jurisdiction
of our exchange.
IV. Already running certificate programmes in capital market successfully.
V. Continuously holding investor programmes for investors and investors groups
through association with brokers, sub brokers, colleges, universities and consumer
groups.

LISTING OF SECURITIES OF COMPANIES AT LSE

At present, LSE has 324 listed companies, out of which 211 are regional and 113 are non
regional. The total listed capital of aforesaid companies is rupees, 3063.56 crore
approximately. The market capitalization of the said company is more than rupees 1890.53
crore. The stock exchange is covering the vast investors base through the listing if above said
companies, which are situated in the region of Punjab, Himachal Pradesh, Jammu & Kashmir
Chandigarh. LSE has facilitated the capital generation for agro based industries as Punjab is an
agriculture led economy. It will continue to do so, once it gets approval for a tie up with
bigger exchanges for commencing trading operations.
 CAPITAL MARKETS

Introduction:
Markets exist to facilitate the purchase and sale of goods and services. The financial market
exists to facilitate sale and purchase of financial instruments and comprises of two major
markets, namely the capital market and the money market. The distinction between capital
market and money market is that capital market mainly deals in medium and long-term
investments (maturity more than a year) while the money market deals in short term
investments (maturity upto a year).
Capital market can be divided into two segments viz. primary and secondary. The primary
market is mainly used by issuers for raising fresh capital from the investors by making initial
public offers or rights issues or offers for sale of equity or debt. The secondary market
provides liquidity to these instruments, through trading and settlement on the stock
exchanges.
Capital market is, thus, important for raising funds for capital formation and investments and
forms a very vital link for economic development of any country. The capital market provides
a means for issuers to raise capital from investors (who have surplus money available from
saving for investment). Thus, the savings normally flow from household sector to business or
Government sector, which normally invest more than they save.
A vibrant and efficient capital market is the most important parameter for evaluating health
of any economy.

Definition
Capital markets provide a wide range of products and services that are related to financial
investments. Capital markets include the stock market, commodities exchanges, the bond
market, and just about any physical or virtual service or intermediary where debt and equity
securities can be bought or sold. Their primary purpose is to raise funds and channel
investors’ money to areas where there is a deficit or need for investment. They play a vital
role as intermediaries between governments and companies, which use them to finance a
myriad of activities.

The capital markets can be broken down into the primary market, where new stocks and
bonds are issued to investors, and the secondary market, where existing stocks and bonds are
traded.

In the primary market, governments, companies, or public sector organizations can obtain
funding through the sale of a new stock or bonds. These are normally issued through
securities dealers and banks, which underwrite the offered stocks or bonds. The issuers earn a
commission, which is built into the price of the security offering.
In the secondary market, stocks and shares in publicly traded companies are bought and sold
through one of the major stock exchanges, which serve as managed auctions for stock. A
stock exchange, share market, or bourse is a company, corporation, or mutual organization
that provides facilities for stockbrokers and traders to trade stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities, trading in other
financial instruments, and the payment of income and dividends.

History of Capital Markets

The origin of Capital Markets goes back to the early 17th century. The Dutch were the
pioneers in capital markets and they successfully leveraged the power of capital markets to
withstand the British and won three wars against them, despite being a smaller nation in all
aspects. Finally, British collaborated with the Dutch and became an expert in leveraging
Capital Markets that led to the rise of the British Empire. One major reason for the success of
British Empire over the French, despite France having population three times that of the
British, was that they were able to raise capital from public at low interest rates, whereas it’s
counter parts, such as French didn’t have superior financial markets and their cost of raising
the capital from public was very high.

In the United States of America, the stabilization of securities market begun with the passing
of the “Blue Sky Law” in 1911 in the Kansas State to protect investors through anti-fraud
provisions, regulation of brokers, dealers and registration of securities. The technology
innovation in United States made them the biggest economy in the world. Information
Technology led to paradigm shift and revolutionized the structure and functioning of Capital
Markets by reducing information asymmetry and assisting faster settlements of transactions.
The most significant development in Capital Markets is the way the technology has erased the
geographical boundaries.

The story of Capital Markets in India dates back to the 18 th century when trading shares of
East India commenced. The real story of India’s Capital Markets started in July 1875 with the
formation of Stock Exchange in Mumbai by the brokers. India’s Capital Market in terms of
GDP raised from 75 percent in 1995 to 130 percent of GDP in 2005. But the relative growth
compared to US, Malaysia and South Korea remains low, indicating immense untapped
potential.

Advantages:
 Capital markets provide the lubricant between investors and those needing to raise
capital.
 Capital markets create price transparency and liquidity. They provide a safe platform
for a wide range of investors —including commercial and investment banks, insurance
 companies, pension funds, mutual funds, and retail investors—to hedge and
speculate.
 Holding different shares or bonds allows an investor to spread investment risk.
 The secondary market gives important pricing information that permits efficient use of
limited capital.

Disadvantages:
 In capital markets, bond prices are influenced by economic data such as employment,
income growth/decline, consumer prices, and industrial prices. Any information that
implies rising inflation will weaken bond prices, as inflation reduces the income from a
bond.
 Prices for shares in capital markets can be very volatile. Their value depends on a
number of external factors over which the investor has no control.
 Different shares can have different levels of liquidity, i.e. demand from buyers and
sellers.

Functions of the capital market

The major objectives of capital market are:

• To mobilize resources for investments.
• To facilitate buying and selling of securities.
• To facilitate the process of efficient price discovery.
• To facilitate settlement of transactions in accordance with the predetermined time Schedules.

What is the role of capital markets in an economy?

Provides an important alternative source of long-term finance for long-term productive

investments. This helps in diffusing stresses on the banking system by matching long-term
investments with long-term capital.

Provides equity capital and infrastructure development capital that has strong socio-economic
benefits - roads, water and sewer systems, housing, energy, telecommunications, public
transport, etc. - ideal for financing through capital markets via long dated bonds and asset
backed securities.

Provides avenues for investment opportunities that encourage a thrift culture critical in
increasing domestic savings and investment ratios that are essential for rapid industrialization.
The Savings and investment ratios are too low, below 10% of GDP.
 Encourages broader ownership of productive assets by small savers to enable them
benefit from Kenya’s economic growth and wealth distribution. Equitable distribution of wealth
is a key indicator of poverty reduction.

Promotes public-private sector partnerships to encourage participation of private sector

in productive investments. Pursuit of economic efficiency shifting driving force of economic
development from public to private sector to enhance economic productivity has become
inevitable as resources continue to diminish.

Assists the Government to close resource gap, and complement its effort in financing essential
socio-economic development, through raising long-term project based capital.

Improves the efficiency of capital allocation through competitive pricing mechanism for
better utilization of scarce resources for increased economic growth.
Provides a gateway to Kenya for global and foreign portfolio investors, which is critical in
supplementing the low domestic saving ratio.

The Importance of Capital Market for the Economic Development of India

Capital Market is a channel through which the wealth of savers are put into long-term
productive use. Both the Equity and Bond markets are parts of Capital Markets. Governments
and Companies use Capital Markets to raise money for their long-term investments. The capital
is raised through debt and equity instruments. Capital Markets are of two types: Primary
market is a market for new shares and secondary market is a market for trading existing
securities.

Significance of Capital Markets

Allocation of Capital: One of the major economic benefits generated by development of the
Capital Markets is improved allocation of capital. The prices of Equity and Debt respond
immediately to change in market conditions and quickly embodied in current asset prices. The
signal created by the price change encourages or discourages capital inflow to an
industry/company.

Allocation of Risk: The other major economic benefit generated by development of the Capital
Markets is improved allocation of Risk. Capital Markets facilitates investors to earn returns
based on their risk taking ability. Investors invest in high-risk instruments either because they
are less risk averse or because the new risk is unaffected or negatively correlated with other
investments in the portfolio.

Mobilization of Savings: Capital Markets is a good channel to move idle savings to most
productive units in the economy. In any economy savings are moved to borrowers through
Capital Markets or through Banking Financial Corporations/ Non-Banking Financial
Corporations. In the first case the transaction occurs through the exchange of securities. In case
of common stock the transfer results in ownership and in case of debt there is a contractual
obligation to pay interest rate and debt. The advantage of investing in Capital Markets is the
price of the securities fluctuates in response to change in supply and demand and can be
brought and sold to third parties. As a result, the investor usually has a good idea of what the
securities are worth and can obtain liquid funds by selling the securities. On the other hand, in
the second case the investor doesn’t have claim over the ultimate beneficiary of the funds and
the price of the claim doesn’t fluctuate in response to shift in supply and demand.

Policy Making: Capital Markets play an important role in improving policy framework of a
country. This is because when policy makers embark on bad policies the equity and bond prices
tend to fall. Capital markets anticipate the future prospects of a country thus they reduce
politician’s incentives to do things that provide short-term gains, but that brings long-term
costs that will hurt the economy.

The postponement of new GAAR proposal and Retrospective taxation amendments shows how
Capital Markets impact policy making. After amendment of GAAR and Retrospective taxation
amendments in budget last year (2012) both FDI and FII inflows dropped and stock market fell
down that led to fall in rupee value and credit rating by top rating agencies.

Micro, Small and Medium Enterprises (MSME): Traditionally MSME are the ones that faced
difficulty in obtaining capital at low interest rate, but MSME sector contributes 8% of the
country's GDP, 45% of the manufactured output and 40% of our exports. It provides
employment to about 6 crore people and are the largest generator of employment in Indian
Economy.

Apart from the facts mentioned above, about the significance of Capital Markets, there is a vast
amount of empirical data that supports the importance of Capital Markets facilitating economic
growth. The view that Capital Markets is associated with superior economic performance can
be verified by looking the correlation between Real GDP VS performance of Capital Markets in
developed economies. Below is the list of superior economic performance in five major
respects in countries with good Capital Market environment.

 Higher productivity growth

 Higher real-wage growth
 Greater employment opportunities
 Greater macroeconomic stability
 Greater homeownership
Conclusion

If one looks into history and traces back the reasons for flourishing of economies such as Dutch
and United Kingdom the reasons for the success of these economies lies in piping the public
saving in to long-term investments. The Dutch were the first to procure funds from public; they
raised capital to trade and maintain battle ships in order to protect their ships from the pirates.
British had replicated the Dutch financial system and became an Empire and eventually the
countries that replicated good Capital Market practices, like United States, also flourished.

The Capital Markets play a significant role in any economy from allocation of Capital and Risk to
Policy Making. If there is any single factor that makes a huge impact in improving the GDP of a
country, it is the effective allocation of capital to the Industry and Government. Capital Market
is the best channel to route the savings into long-term productive use. If we look in to the
economy and find the enterprises that were hit by high cost of capital, one can observe that
MSME that provides highest number of employment opportunities were worst hit by it. If a
country develops and adopts best Capital Market practices they create multiple effects and
helps in reviving the economy. The SME Exchange is a welcome move for the Small and
Medium Scale Enterprises, but it is alone not enough to revive MSME.

Capital market is the heart of any economy through which the savings are channelized into
effective long-term investments. A developed and vibrant Capital Market will immensely
contribute towards speedy economic growth and development.

THE IMPORTANCE OF CAPITAL MARKET IN ECONOMY

1. INTRODUCTION
It is very difficult today to imagine ourselves the times when there were no banks, stock
markets, money markets, public debts, times when the fortune of a person was only measured
by the surface of land owned, by the number of animals one possessed as well as by the
number of work hands one could use in the working the field. Economies presented themselves
in the form of gold or silver goblets or jewels, and usury – the practice consisting of the
charging of interest on money – was prohibited both by law and by the Church.
The capital market today is a reality met in any modern economy. It is a market thenecessity of
which is unchallengeable, an extremely dynamic and innovative structure, permanently
adapting to the economic environment and at the same time an influential factor of it,
generating opportunities and to the same extent risk for all categories of participants to the
economic activity, being a replica of a national economy to a small scale, but nevertheless
especially representative.
Tributary to the conditions in which it was formed and developed, the capital market brings
together under this syntagma different conceptions. The continental-European conception
attributes to this market a more comprising structure, containing the monetary market, the
mortgage market and the financial market. In the Anglo-Saxon conception, which the economic
practice has also adopted in our country, the capital market is a component of the financial
market together with the monetary market and the insurance market.
2. CAPITAL MARKETS COMPONENTS AND FUNCTION
The specificity of this market derives from numerous aspects, but defining and at the same time
delimitative in relation to other components of the financial market are the following traits:
It is a market specialized in transactions with medium and long term financial assets, unlike
the monetary market which offers solutions for refinancing through short and medium term
capitals;
It is a public, open and transparent market, in the sense that anyone can be a participant on
this market, without there being notable entry or exit barriers, the transactions having a public
character;
The dissemination of information on this market, through its volume or, quickness and with
the possibility of equal reception by all participants, is probably the best one from the ones
existing in the structures of a market economy;
The capital circulation vehicle is represented by securities, characterized through
negotiability of the price and immediate transferability with very low transaction costs;
The transaction is made through intermediaries, who have an essential role in connecting the
owners or issuers of securities with the owners of capitals;
It entails risks both for the issuer and for the investor, specific for each financial instrument
in question, but at the same time it also offers complex solutions for minimizing and dispersing
it, both the financial and the operational one;
It is an organized market, in the sense that the transactions are performed according to
certain principles, norms and rules known and accepted by participants. This does not mean the
administration of the market, but its regulation with the purpose of creating or preserving the
conditions for the unfolding of free competition, so a system for guaranteeing the free and
open character of all transactions.
In a market economy, the role of the capital market is of first rate. The well functioning of the
capital market is vital in the contemporary economy in order to be able to perform an efficient
transfer of money resources from those who save towards those who need capital and those
who succeed to offer it a higher capitalization; the capital market can significantly influence the
quality of the investment decisions.
Depending on the moment when the transaction is performed, the capital market is divided
into two temporal dependant segments: primary and secondary.
The primary market has the role of placing the issuing of securities, to attract the available
financial capitals on medium and long term, both on the internal capital markets, and on the
international one appealing to the public economies.
The secondary market – once the securities are set into circulation, through the issuance on the
primary market, they are the object of transactions on the secondary market. The existence of
this type of market offers to the owners of shares and bonds the possibility to capitalize them
before they bring a profit (dividends or interests). The secondary market represents, at the
same time, the way to concentrate in the same place private or institutional investors who can
sell or buy securities, having the guarantee that they are valuable and can be reinserted into
the circuit at any time.
The secondary market is also the almost perfect expression of the free adjustment between the
offer and demand of securities, being a barometer, in the first place for the need for capital, but
also for the economic, social and political state of a country. From this point of view, the
secondary capital market can be considered a perfect market, where the law of demand and
offer finds the perfect terrain for its unfenced action. Ensuring the mobility of capitals, of
liquidities on long and medium term, of the negotiability of any security that passes the primary
market, the secondary market attracts, at the same time, professional investors, but also
amateur investors, in the hope of a maximum profit in record time.
The stock exchange is an important institution of the capital market, specific to the market
economy, which concentrates in the same geographical and economic space the demand and
offer of securities, openly, freely and permanently negotiated, based on known regulations. The
stock exchanges always represent an extremely sensitive and accurate barometer of the status
quo in the economic, geo-political and foreign currency field. The price a security is negotiated
for accurately reflects the economic-financial state of the company that issued it, in a positive
or negative sense.
Most times, because of the interdependencies in a national economy, but also at world level,
the modification of the rate of a certain security can attract with it chain modifications, with
repercussions on other securities. It is true that, sometimes, the stock exchange can register
false signals (incidental or directed), disturbing the real situation. The psychological and
emotional factors have always had and will continue to have a notable role.
A question the enterprisers and the smaller or larger companies always ask themselves is:
Which is the optimum way for financing investments? The answers are not many and along
time they were the same: either using the own fortune, either requesting a subsidy from the
state or from another institution or from anywhere else, or obtaining a bank loan or turning to
the stock market.
The first option is only possible for those who own the necessary capital. The second option is
determined by exceptional situations. In regard to the bank loan, although it is a more realistic
option than the other two, it is maybe not the most wanted one, first because it is expensive
(the interests are, in general, quite high) and, second, the banks set a series of hard and strict
conditions, often difficult to meet by the applicant.

A possibility, for an enterpriser or for a company, to obtain money

(capital), avoiding the problems raised by the options above, is represented by the public sale
of shares or bonds with the help of the stock exchange. The stock exchange ensures the
shortest and most efficient circuit between the economies or temporary surplus of capital of
those who want to invest on medium or long term (be it companies, funds, banks, insurance
companies or plain private individuals) and the needs for financing of the enterprisers or of the
commercial companies. The stock exchange becomes thus a strong competitor for the banks,
representing a serious alternative to the bank loan, often times more expensive and difficult to
obtain.
From the above it is clearly noted that the main role of the stock markets is that of financing
the economy (especially the economic agents), by mobilizing capitals on medium and long
term. Also, another important role of the stock exchange is that it facilitates the circulation of
capitals, the securities being easily transformed into liquidities or exchanged into other
securities, by selling or re-selling them on this market.
The most important function of the stock exchange is that the transactions with the securities
issued and initially placed on the primary capital market are performed here. After the
securities have been issued and placed with the investors, they can be freely transacted on the
stock exchange because of their negotiable character, thus guaranteeing the investor that he
can recuperate the placed money funds, of course for the value they have on that date on the
market.
Also, the stock exchange is the place and instrument for some important sector reorganizing
and restructurings. On the stock markets a redistributing of the financings within the economy
takes place: the financial funds are oriented towards more lucrative or perspective fields,
because an investor can very easily sell here the securities he no longer considers to be a very
good placement and invest in a sector he considers more attractive.
Another interesting aspect is that of the acquiring of companies and of mergers on the stock
market, which are increasingly frequent. The stock exchange facilitates these operations and
the main instrument through which the tender offer is performed. The tender offer is the
operation performed through a intermediation company through which an investor announces
that he is willing to buy partially or all the shares on the market of a commercial company he is
interested on, for a firm price and within a well defined period of time. This is how most
takeovers, transfers and mergers take place on the stock market.

On the stock exchange the sell-buy price for the quoted securities is
permanently established and displayed. The stock market offers systematic information
concerning the rate of the quoted securities and, implicitly, information on the listed
companies and even on the respective economy on the whole. In this sense an important
indicator is the stock exchange capitalization of a listed company, which shows the market
value of that company: it is calculated by multiplying the total number of shares of that
company with their market rate. In order to evaluate the dimensions of a stock market the total
stock exchange capitalization can also be calculated by adding all the stock exchange values
(stock exchange capitalizations) of the companies listed on those markets.

Finally, the stock exchange reflects especially accurately the overall situation of an
economy, as well as its trends and perspectives. Especially useful for this purpose is the
studying of the stock exchange indexes, calculated as an average of the evolutions and of the
volume of transactions for a representative sample of shares or for their totality, on each stock
exchange in part.
The collection of the temporary available capitals in the economy, the reallocation of those
insufficient of inefficiently capitalized at a certain point and even the favoring of some sector
restructurings, are meant to outline the place presently occupied by the capital market in the
economy of many countries, not only the most developed ones.

The observation that in the developing countries the same attention must be granted to the
starting and developing of an efficient financial market is well-founded, just as much as the
preoccupations for developing the infrastructure of telecommunications. This is more
important in the transition countries, considering the necessity to reorient resources from the
inefficient sectors towards to efficient ones, thus ensuring the increase of efficiency in
economy, supporting the economic reform process and even the privatization actions.

3. CONCLUSIONS
The importance of the financial market is given by the significant role it plays in the finances
(financing) of the enterprises and of the state, by the percentage the direct financing has
among the methods for financing. Beyond what is apparently important - the high volume of
transactions on the stock market - what really counts is the place the (primary) market holds in
the development first of the stock companies (direct financing), and this is sometimes
forgotten, or appears secondary. The well functioning of the financial market is a strong
fundament for ensuring a lasting growth, on the long term, of the national economy; the
financial market and firstly the capital market represent in many countries – and could also
represent in Romania – the engine for economic development.
If to a certain extent they can be replaced as financing sources,
it must not be understood that financing through the banking system and financing through the
capital market are perfectly replaceable, but rather complementary. In most cases, the issuing
of shares or bonds tend to sooner supplement, than replace the bank loans, especially when
the allocation of some important resources is wanted for sustaining some large investment
plans, when a farther horizon for the maturity of the loan is sought, or even obtaining non-
refundable funds for the price of dilution of capital and future dividends.
More and more issuers turn to financing instruments which not until long ago
seemed too sophisticated, and the “theoretical” advantages of the listing on the stock exchange
start to be the put into practice. The ability of the capital market to mobilize important financial
resources now is no longer doubted and any company listed on the stock exchange will also
consider from now on the issuing of bonds or shares among its financing options.

The Romanian capital market is ready both for the financing of companies and
for the use of some sophisticated methods for forming the subscription price, and through the
behavior of investors recently, it seems keen for new securities. This does not mean it can
absorb the entire necessary of financing of the Romanian economy or that it can handle
debt/equity financing ratios such as those from the developed capital markets, but nor can it be
said that it does not offer sufficient liquidity or that the risk of the volatility of prices in the case
of some public offers is alarming. Moreover, the current moment is an especially favorable one
for the unfolding of this financing process for businesses, process also propelled by an overall
economic conjuncture favorable for investments, through a stock market found under the sign
of the bull, through a penetration in Romania of important foreign capital funds that seek
placements as profitable as possible.

Capital Market Instruments – some of the capital market instruments are:

• Equity
• Preference shares
• Debenture/ Bonds
• ADRs/ GDRs
• Derivatives

Corporate securities

Shares
The total capital of a company may be divided into small units called shares. For example, if the
required capital of a company is US $5,00,000 and is divided into 50,000 units of US $10 each,
each unit is called a share of face value US $10. A share may be of any face value depending
upon the capital required and the number of shares into which it is divided. The holders of the
shares are called share holders. The shares can be purchased or sold only in integral multiples.
Equity shares signify ownership in a corporation and represent claim over the financial assets
and earnings of the corporation. Shareholders enjoy voting rights and the right to receive
dividends; however in case of liquidation they will receive residuals, after all the creditors of the
company are settled in full. A company may invite investors to subscribe for the shares by the
way of:
• Public issue through prospectus
• Tender/ book building process
• Offer for sale
• Placement method
• Rights issue

Stocks
The word stock refers to the old English law tradition where a share in the capital of the
company was not divided into “shares” of fixed denomination but was issued as one chunk.
This concept is no more prevalent, but the word “stock” continues. The word “joint stock
companies” also refers to this tradition.

Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and repay the borrowed
amount after a specified period of time is a debt instrument. Certain features common to all
debt instruments are:
• Maturity – the number of years over which the issuer agrees to meet the contractual
obligations is the term to maturity. Debt instruments are classified on the basis of the time
remaining to maturity
• Par value – the face value or principal value of the debt instrument is called the par value.
• Coupon rate – agreed rate of interest that is paid periodically to the investor and is calculated
as a percentage of the face value. Some of the debt instruments may not have an explicit
coupon rate, for instance zero coupon bonds. These bonds are issued on discount and
redeemed at par. Thus the difference between the investor’s investment and return is the
interest earned. Coupon rates may be fixed for the term or may be variable.
• Call option – option available to the issuer, specified in the trust indenture, to ‘call in’ the
bonds and repay them at pre determined price before maturity. Call feature acts like a ceiling f
or payments. The issuer may call the bonds before the stated maturity as it may recognize that
the interest rates may fall below the coupon rate and redeeming the bonds and replacing them
with securities of lower coupon rates will be economically beneficial. It is the same as the
prepayment option, where the borrower prepays before scheduled payments or slated
maturity
 Some bonds are issued with ‘call protection feature, i.e they would not be called for a
specified period of time
 Similar to the call option of the issuer there is a put option for the investor, to sell the
securities back to the issuer at a predetermined price and date.
The investor may do so anticipating rise in the interest rates wherein the investor would
liquidate the funds and alternatively invest in place of higher interest
• Refunding provisions – in case where the issuer may not have cash to redeem the debt
instruments the issuer may issue new debt instrument and use the proceeds to repay the
securities or to exercise the call option.
Debt instruments may be of various kinds depending on the repayment:
• Bullet payment – instruments where the issuer agrees to repay the entire amount at the
maturity date, i.e lumpsum payment is called bullet payment
• Sinking fund payment – instruments where the issuer agrees to retire a specified portion of
the debt each year is called sinking fund requirement
• Amortization – instruments where there are scheduled principal repayments before maturity
date are called amortizing instruments

Debentures/ Bonds
The term Debenture is derived from the Latin word ‘debere’ which means ‘to owe a debt’. A
debenture is an acknowledgment of debt, taken either from the public or a particular source. A
debenture may be viewed as a loan, represented as marketable security. The word “bond” may
be used interchangeably with debentures.
Debt instruments with maturity more than 5 years are called ‘bonds’

Yields
Most common method of calculating the yields on debt instrument is the ‘yield to maturity’
method, the formula is as under:
YTM = coupon rate + prorated discount / (face value + purchase price)/2

Main differences between shares and debentures

• Share money forms a part of the capital of the company. The share holders are part
proprietors of the company, whereas debentures are mere debt, and debenture holders are
just creditors.
• Share holders get dividend only out of profits and in case of insufficient or no profits they get
nothing and debenture holders being creditors get guaranteed interest, as agreed, whether the
company makes profit or not.
• Share holders are paid after the debenture holders are paid their due first
• The dividend on shares depends upon the profit of the company but the interest on
debentures is very well fixed at the time of issue itself.
• Shares are not to be paid back by the company whereas debentures have to be paid back at
the end of a fixed period.
• In case the company is wound up, the share holders may lose a part or full of their capital but
he debenture holders invariably get back their investment.
• Investment in shares is riskier, as it represents residual interest in the company.
Debenture, being debt, is senior.
• Debentures are quite often secured, that is, a security interest is created on some assets to
back up debentures. There is no question of any security in case of shares.
• Share holders have a right to attend and vote at the meetings of the share holders whereas
debenture holders have no such rights.

Quasi debt instruments

Preference shares
Preference shares are different from ordinary equity shares. Preference share holders have the
following preferential rights
(i) The right to get a fixed rate of dividend before the payment of dividend to the equity
holders.
(ii) The right to get back their capital before the equity holders in case of winding up of the
company.

Segments of capital market

The Capital Market consists of
A) Primary Market
B) Secondary Market

Primary Market: A market where the issuers access the prospective investors directly for
funds required by them either for expansion or for meeting the working capital needs. This
process is called disintermediation where the funds flow directly from investors to issuers. The
other alternative for issuers is to access the financial institutions and banks for funds. This
process is called intermediation where the money flows from investors to banks/financial
institutions and then to issuers.
Securities CDSL BCCD–June 2010 Page 5 of 144Primary market comprises of a market for new
issues of shares and debentures, where investors apply directly to the issuer for allotment of
shares/ debentures and pay application money to the issuer. Primary market is one where
issuers contact directly to the public at
large in search of capital and is distinguished from the secondary market, where investors buy/
sell listed shares / debentures on the stock exchange from / to new existing investors. Primary
market helps public limited companies as well as Government organizations to issue their
securities to the new / existing shareholders by making a public issue / rights issue. Issuer’s
increase capital by expanding their capital base. This enables them to finance their growth
plans or meet their working capital requirements, etc. After the public issue, the securities of
the issuer are listed on a stock exchange(s) provided it complies with requirements prescribed
by the stock exchange(s) in this regard. The securities, thereafter, become marketable. The
issuers generally get their securities listed on one or more than one stock exchange. Listing of
securities on more than one stock exchange enhances liquidity of the securities and results in
increased volume of trading. A formal public offer consists of an invitation to the public for
subscription to the equity shares, preference shares or debentures has to be made by a
company highlighting the details such as future prospects, financial viability and analyse the risk
factors so that an investor can take an informed decision to make an investment. For this
purpose, the company issues a prospectus in case of public issue and a letter of offer in case of
rights issue, which is essentially made to its existing shareholders. This document is generally
known as Offer document. It has the information about business of the company, promoters
and business collaboration, management, the board of directors, cost of the project and the
means of finance, status of the project, business prospects and profitability, the size of the
issue, listing, tax benefits if any, and the names of underwriters and managers to the issue, etc.
The issuers are, thus, required to make adequate disclosures in the offer documents to enable
the investors to decide about the investment.
Making public issue of securities is fraught with risk. There is always a possibility that the issue
may not attract minimum subscription stipulated in the prospectus. The risk may be high or low
depending upon promoters making the issue, the track record of the company, the size of the
issue, the nature of project for which the issue is being made, the general economic conditions,
etc. Issuers would like to free themselves of this worry and attend to
CDSL BCCD–June 2010 Page 6 of 144 their operations wholeheartedly if they could have
someone else to worry on their behalf. For this purpose the companies approach underwriters
who provide this service.
Normally, whenever an existing company comes out with a further issue of securities, the
existing holders have the first right to subscribe to the issue in proportion to their existing
holdings. Such an issue to the existing holders is called ‘Rights issue’. The price of the security
before the entitlement of rights issue is known as the cum-rights price. The price after the
entitlement of rights issue is known as the ex-rights price. The difference between the two is a
measure of the market value of a right entitlement. An existing holder, besides subscribing to
such an issue, can let his rights lapse, or renounce his rights in favour of another person (free,
or for a consideration) by signing the renunciation form.
The companies declare dividends, interim as well as final, generally from the profits after the
tax. The dividend is declared on the face value or par value of a share, and not on its market
price.
A company may choose to capitalize part of its reserves by issuing bonus shares to existing
shareholders in proportion to their holdings, to convert the reserves into equity. The
management of the company may do this by transferring some amount from the reserves
account to the share capital account by a mere book entry. Bonus shares are issued free of cost
and the number of shareholders remains the same. Their proportionate holdings do not
change. After an issue of bonus shares, the price of a company’s share drops generally in
proportion to the issue.

Activities in the Primary Market

1. Appointment of merchant bankers

2. Pricing of securities being issued
3. Communication/ Marketing of the issue
4. Information on credit risk
5. Making public issues
6. Collection of money
7. Minimum subscription
8. Listing on the stock exchange(s)
9. Allotment of securities in demat / physical mode
10. Record keeping

How does Primary Market work?

Preparation and Filing of Offer Document:
i. A company wanting to raise capital from the public is required to prepare an offer document
giving sufficient information and disclosures, which enables (potential) investors to make an
informed decision. Accordingly, the offer document is required to contain details about the
company, its promoters, the project, financial details, objects of raising the money, terms of the
issue etc. ‘How to read the offer document’ is dealt in the section ‘How to apply in public
issue’.
ii. The issuer company engages a SEBI registered merchant banker to prepare the offer
document. Besides, due diligence in preparing the offer document, the merchant banker is also
responsible for ensuring legal compliance. The merchant banker facilitates the issue in reaching
the prospective investors (marketing the issue).
iii. The draft offer document thus prepared is filed with SEBI and is made available on SEBI’s
website (http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70) along with its status of
processing (http://www.sebi.gov.in/PMDData.html). Company is also required to make a public
announcement about the filing English, Hindi and in regional language newspapers. In case,
investors notice any wrong / incomplete / lack of information in the offer document, they may
send their representation / complaint to the merchant banker and / or to SEBI.
iv. The Indian regulatory framework is based on a disclosure regime. SEBI reviews the draft
offer document and may issue observations on the draft offer document with a view to ensure
that adequate disclosures are made by the issuer company/merchant bankers in the offer
document to enable the investor to make an informed investment decision in the issue. It must
be clearly understood that
SEBI does not “vet” and “approve” the offer document.
v. SEBI’s observations on the draft offer document are forwarded to the merchant banker, who
incorporates the necessary changes and files the final offer document with SEBI, Registrar of
Companies (ROC) and stock exchange(s).
This is made available on websites of the merchant banker, stock exchange(s) and SEBI.
Opening of the Issue:
vi. After completing legal formalities, the issuer company issues advertisements in
English, Hindi and regional language news papers and the issue is open to public for
subscription.
vii. If the prospective investor is interested in subscribing to the shares of the issuer company
based on what is disclosed in the offer document, he can apply for its shares (or debentures)
before the issue closes, by duly filling up the application form and making the payment. ‘How
to apply invest in (public) issues’, is covered separately.
viii. The entire back office operation of the public issue, including processing of application
forms, despatch of refunds, allotment of securities, is handled by the Registrar to the Issue
(RTI) on behalf of the issuer company.
ix. It is to be noted that only one application per PAN is allowed in any issue. If investor makes
more than one application, all the applications are liable to be rejected. The RTI matches
applicant’s name in the application form and verifies it against the PAN, demat account details
(DP ID and Demat A/c No) and also weeds out duplicate applications.

Allotment and Listing:

x. The issue then closes (investor cannot apply beyond the closing date) and the shares are
allotted to the applicants proportionally or on lottery basis, if there is oversubscription. The
merchant banker and RTI finalize the ‘basis of allotment’.
This is approved by the stock exchange officials and the basis of allotment is made available in
the website of the RTI. The issuer company issues advertisements in English,
xi. Upon allotment, investor will receive demat credit within 12 days. The dispatch of refund
cheques, instructions for unblocking amount in bank account (for
ASBA) and instructions for electronic credits of refund money, is given by the RTI within 12
days of the close of the issue. ASBA is dealt in the section ‘How to apply in public issue’.
xii. The shares of the company are then listed on the stock exchange within 12 working days of
the close of the issue. Listing of shares (or debentures) in stock exchange enables the investor
to buy securities from or sell securities to other investors (secondary market).
xiii. The complete contact details of all the intermediaries involved in an issue namely merchant
banker, RTI, banker to the issue etc. are available in the offer document. In case the investor
needs any clarification they can contact them.
Different types of issues
i. Public issue: When a company raises funds by selling (issuing) its shares (or debenture /
bonds) to the public through issue of offer document (prospectus), it is called a public issue.
1) Initial Public Offer: When a (unlisted) company makes a public issue for the first time and
gets its shares listed on stock exchange, the public issue is called as initial public offer (IPO).
2) Further public offer: When a listed company makes another public issue to raise capital, it is
called further public / follow-on offer (FPO).
ii. Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in
unlisted company when it is very small or at an early stage. Subsequently, when the company
becomes large, these investors sell their shares to the public, through issue of offer document
and the company’s shares are listed in stock exchange. This is called as offer for sale. The
proceeds of this issue go the existing investors and not to the company.
iii. Issue of Indian Depository Receipts (IDR): A foreign company which is listed in stock
exchange abroad can raise money from Indian investors by selling (issuing) shares. These shares
are held in trust by a foreign custodian bank against which a domestic custodian bank issues an
instrument called Indian depository receipts
(IDR), denominated in `. IDR can be traded in stock exchange like any other shares and the
holder is entitled to rights of ownership including receiving dividend.
iv. Others:
1) Rights issue (RI): When a company raises funds from its existing shareholders by selling
(issuing) those new shares / debentures, it is called as rights issue. The offer document for a
rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days.
Existing shareholders are entitled to apply for new shares in proportion to the number of shares
already held. Illustratively, in a rights issue of 1:5 ratio, the investors have the right to subscribe
to one (new) share of the company for every 5 shares held by the investor.
2) In a Bonus Issue, the company issues new shares to its existing shareholders.
As the new shares are issued out of the company’s reserves (accumulated profits), shareholders
need not pay any money to the company for receiving the new shares.
The net worth (owner’s money) of a company consist of its equity capital and its reserves. After
a bonus issue, there is an increase in the equity capital of the company with a corresponding
decrease in the reserves, while the net worth remains constant. In a bonus issue of 5:1 ratio,
the investor will receive five new shares of the company for each share the investor held as
illustrated below.

d. Pricing of (public) issues

On the basis of pricing, issues can be classified into Book Built issues and Fixed Price issues. We
shall focus on the book built issues as most of the issues nowadays are through this method.
i. In a Book Building issue the issuer company mentions the minimum and maximum price
(price band) at which it will sell (issue) its shares. Thus the offer document (in this case, called
the Red Herring Prospectus) contains only the price band instead of the price at which its
shares are offered to the public.
Within this price band the investor can choose the price at which the investor are willing to buy
the shares and also the quantity. As this process is similar to bidding in an auction, the
application form for book built issue is also known as the bid form.
At times the issuer may revise the price band (revision of price band) which has to be
accompanied with news paper advertisement.
Bids by various investors are entered into the stock exchange system through the broker’s (also
called syndicate member) terminal. The list of the bid received from investors at various price
bands is known as the ‘book’ and can be seen in the website(s) of the stock exchange for each
investor category.
Based on the total demand in the ‘book’, the cut off price is then decided by the issuer and
merchant banker. The cut off price is the price at which the cumulative demand for shares,
equals or exceeds the offer size.
.
2. How to invest in (public) issue?
a. The pre-requisites
(i) The investor need to have Permanent Account Number (PAN) issued by the
Income Tax Department and quote the same in the application form. However, the investors
are not required to attach photocopy of PAN along with the application form.
(ii) Bank account
(iii) Shares or debentures allotted in a public issue will be credited to the investor’s account in
electronic form. For this the investor need to have a demat account and the investor need to
fill up the correct 16 digit demat account number in the application form.
1. How to obtain prerequisites
(i) Obtaining PAN: The website of Tax Information Network of Income Tax
Department provides on-line application for PAN.
The investor can submit his application and make payment on line or off line and forward
physically copies of the required documents [proof of identity, proof of residence, photograph
and demand draft (if the payment is off line)] to the address mentioned therein.
(ii) Opening Demat account: Just as money is kept in bank account, shares and debentures can
be kept in electronic form in a demat account by an entity called Depository.
For opening a demat account, the investor has to approach a Depository Participant (DP), an
agent of Depository, and fill up an account opening form. The list of DPs is available in the
websites of Along with the account opening form, the investor must enclose the any one of the
following document for proof of identity and proof of address as under.
No. Documents for proof of identity
Documents for proof of address
1 Passport
2 Voter ID card
3 Driving license
4 Identity card / document with applicant’s Photo, issued by
a. Central / State Government and its Departments
b. Statutory / Regulatory Authorities
c. Public Sector Undertakings
d. Scheduled Commercial Banks
e. Public Financial Institutions
f. Colleges affiliated to Universities
g. Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members and;
h. Credit cards / Debit cards issued by banks
5 PAN cards with photograph Bank Passbook
6 - Ration Card
7 - Verified copies of
a) Electricity bills (not more than 2 months old)
b) Residence Telephone bills (not more than 2 months old) and
c) Lease and License agreement /
Agreement for sale
8 - Self-declaration by High Court and
Supreme Court judges, giving the new address in respect of their own accounts
The investor has to produce the original documents, including PAN card, for verification by the
DP at the time of account opening.
The investor will have to enter into an agreement with DP in the standard format, which gives
details of rights and duties of investor and DP. The investors are entitled to receive a copy of
the agreement and schedule of charges for future reference.
The DP will open then account and give the investor a 16 digit demat account number (8 digit
DP ID and 8 digit Client ID). All purchase / investment in securities will be added (credited) to
this account. Upon sale of securities, the demat account will be reduced (debited).
b. Getting the offer document
The offer documents of public issues are available on the websites of merchant banker and
stock exchange. It is also available in the website of SEBI under ‘Offer Documents’ section The
investor can obtain hard copy of the offer document from SEBI upon payment of ` 100 through
Demand Draft made in favor of Securities & Exchange Board of India or obtain it from the issuer
company at its registered office or from the merchant banker. The abridged prospectus
contains all the salient features of the offer document and is available along with the issue
application form.

d. How to fill the application form

(i) General:
You can make up to 3 bids in the same application form in book built issues.
Alternatively, you can choose to bid at the ‘cut off’ option, if your investment amount is less
than ` 200,000. Above that amount, you will not be treated as a retail investor and you will be
in the category of ‘non institutional investor’. However, you can submit only one application
per issue.

1 Status of applicant: (Individual / HUF)

2 Name of the applicant(s)
3 Age of the bidder (in case of joint holders, age of first applicant)
4 Depository Participant Name
5 DP ID
6 Category of Investor: (Retail)
7 Payment details: (Cheque / DD Number, Bank Name)
Bank account number, Bank branch details
Check Refund Option, if covered under 68 centers* prescribed by RBI and IFSC code of Bank
Signing the undertaking authorizing to mark a lien of funds by the bank
9 PAN Numbers
10 Signature of applicant
11 - Signature of Bank account holder, if different from applicant
* Available in the offer document and RBI web site
(http://rbidocs.rbi.org.in/rdocs/ECS/PDFs/I87908.pdf)
Fill the form legibly without any crossing, corrections and over writing. Please strike off the non
applicable fields in the application form. Always mention the application form number on the
reverse of the draft / cheque.
Remember to update your bank account number, postal address etc. mentioned in your demat
account as you will receive refund credits / cheques as per the details mentioned in your demat
account.
(ii) ASBA application form:
You can avail ASBA facility even if you do not hold account with SCSB. For this your ASBA
application has to be signed by the account holder.
(iii) If you have bank account with SCSB, you can apply online if the bank offers internet banking
facility.
Grounds for rejections: (even after filling all the above fields)
􀂃 Applications made by partnership firms, minors
􀂃 Payment made by postal order / money order / cash / stock invest
􀂃 Bids made below minimum lot or not in multiples of lot prescribed in the offer document
􀂃 when there is a difference in the Names of the holder(s), DP ID, Client
ID provided in the application and details available with Depository
􀂃 Multiple applications
􀂃 Names of the joint holders are not in the same order as details available with Depository
􀂃 Inactive demat account
􀂃 Applications, which do not bear stamp of the syndicate member
(In case of normal application)
􀂃 Inadequate funds in the bank account
􀂃 Outstation Cheques / Drafts drawn on the banks not participating in the clearing process
e. Submitting the application form
The application form and the offer document have the full contact details of where you can
submit the filled up forms.
Ensure that you submit the application well within the closing date and time specified.
(i) Submit the ASBA application forms to the designate branch of the SCSB/ Syndicate member
and collect Transaction Registration Slip (TRS) / acknowledgement.
(ii) Submit non ASBA application forms to the stock broker (syndicate member) along with a
cheque for the payment and obtain acknowledgement (date stamping on the counterfoil).
(iii) Retain the acknowledgement till allotment / refund is complete as it is crucial evidence in
case of any complaint.
f. Checking the demand for the book built issue at any point of time
The status of bidding in a book built issue is available on the website(s) of stock exchange(s) on
a consolidated basis. The data is also available investor category wise.
g. Revision of bids
You can revise both the price and the quantity of your bid(s) within the price band, till the issue
closing date. For this use the revision form available along with the application form and submit
it to the same broker / SCSB. Remember to collect the revised TRS.
h. Withdrawal of Bids
You can withdraw your bid till the closure of the issue by approaching syndicate member/ SCSB.
After closure of the issue, you can withdraw your bid till the finalization of the basis of
allotment by making a written application to the RTI.
i. Allotment of shares
Shares will be allotted to you and credited to your demat account within 12 days of the close of
the issue.
In the case of bonds/ debentures, the timeline for allotment is 30 days of the close of the issue.
k. Interest for delay in allotment / refund
You are eligible to receive interest @ 15% p.a. upon delay in allotment / refund beyond the
prescribed period.
l. Any other requirement
Peruse the post issue advertisements issued by the company for the issue price and the basis of
allotment.
m. Listing of the shares
Equity shares are listed on the stock exchange for trading within 12 days of closure of the issue.
n. Grievance redressal (non receipt of shares, delay in refund etc.)
In case of any grievance in a public issue, you can approach the compliance officer of the issuer,
whose name and contact details are mentioned on the cover page of the Offer Document.

Secondary Market: In the secondary market the investors buy / sell securities through
stock exchanges. Trading of securities on stock exchange results in exchange of money and
securities between the investors. Secondary market provides liquidity to the securities on the
exchange(s) and this activity commences subsequent to the original issue. For example, having
subscribed to the securities of a company, if one wishes to sell the same, it can be done through
the secondary market.
Similarly one can also buy the securities of a company from the secondary market.
A stock exchange is the single most important institution in the secondary market for providing
a platform to the investors for buying and selling of securities through its members.
In other words, the stock exchange is the place where already issued securities of companies
are bought and sold by investors. Thus, secondary market activity is different from the primary
market in which the issuers issue securities directly to the investors.
Traditionally, a stock exchange has been an association of its members or stock brokers, formed
for the purpose of facilitating the buying and selling of securities by the public and institutions
at large and regulating its day to day operations. Of late however, stock exchanges in India now
operate with due recognition from Securities and Exchange Board of India (SEBI) / the
Government of India under the Securities Contracts (Regulation) Act, 1956.
 The stock exchanges are either association of persons or are formed as
companies. There are 24 recognized stock exchanges in India out of which one has not
commenced its operations. Out of the 23 remaining stock exchanges, currently only on four
stock exchanges, the trading volumes are recorded. Most of regional stock exchanges have
formed subsidiary companies and obtained membership of Bombay Stock Exchange, (BSE) or
National Stock Exchange (NSE) or both. Members of these stock exchanges are now working as
sub-brokers of BSE / NSE brokers.
Securities listed on the stock exchange(s) have the following advantages:
• The stock exchange(s) provides a fair market place.
• It enhances liquidity.
• Their price is determined fairly.
• There is continuous reporting of their prices.
• Full information is available on the companies.
• Rights of investors are protected.

Stockbroker is a member of the stock exchange and is licensed to buy or sell securities for his
own or on behalf of his clients. He charges a commission (brokerage) to the clients on the gross
value of the transactions done by them. However, some of the stockbrokers, apart from buying
and selling of securities for their clients for a commission, offer facilities such as safekeeping
clients’ shares and bonds, offering investment advice, planning clients’ portfolio of investments,
managing clients’ portfolio.
There are experts who believe that by identifying and processing relevant information
pertaining to financials of the companies "correctly" and quickly (as compared to the market as
whole), they can predict the share price movement faster than the market and thus outperform
the market. Such experts are known as fundamental analysts. These experts use the
fundamental approach to security valuation, for estimating the fundamental price (or
fundamental price-earnings multiple) of a security.
Fundamental Analysis refers to scientific study of the basic factors, which determine a share’s
value. The fundamental analyst studies the industry and the company’s sales, assets, liabilities,
debt structure, earnings, products, market share; evaluates the company’s management,
compares the company with its competitors, and then estimates the share’s intrinsic worth.
The fundamental analysts’ tools are financial ratios arrived at by studying a company’s balance
sheet and profit and loss account over a number of years. Fundamental analysis is more
effective in fulfilling long-term growth objectives of shares, rather than their short-term price
fluctuations.
Ratios of values obtained from a company’s financial statements are used to study its health
and the price of its securities. The most important among these are current ratio, price earning
(P/E) ratio, earnings to equity ratio, price-book value ratio, profit before tax to sales ratio, and
quick ratio. Accounting figures, which help to arrive at these ratios, include book value,
dividend, current yield, earning per share (EPS), volatility, etc.
Unlike the fundamental analysts, there are other experts who believe that largely the forces of
demand and supply of securities determine the security prices, though the factors governing
the demand and supply may themselves be both objective and subjective. They also believe
that notwithstanding the day-to-day fluctuations, share prices move in a discernible pattern,
and that these patterns last for long periods to be identified by them.
Such analysts are called as ‘Technical Analysts’.
Technical analysis is a method of prediction of share price movement based on a study of price
graphs or charts on the assumption that share price trends are repetitive, and that since
CDSL BCCD–June 2010 Page 9 of 144 investor psychology follows certain pattern, what is seen
to have happened before is likely to be repeated. The technical analyst is not concerned with
the fundamental strength or weakness of a company or an industry; he studies investor and
price behavior.
A stock market operator who expects share prices to fall in the immediate future and keeps
selling (with the intention to pick up the shares later at a lower price for actual delivery),
causing selling pressure and lowering the prices further is called a "Bear”. The term is derived
from the attacking posture of the bear, pushing downwards.
A stock market operator who expects share prices to rise and keeps buying (to sell the shares
later at higher price), causing buying pressure and increasing the prices further is called a
“Bull”. The term is derived from the attacking posture of the bull, pushing upwards.
Stag is a person who subscribes to a new issue with the primary objective of selling at profits no
sooner than he gets the allotment.
Contract Note is a document given by the stockbroker to his clients giving particulars of the
securities bought / sold, rate and date of transaction and the broker’s commission. The broker
sends the contract note after executing the client’s order as an agreement. The contract note
must be carefully preserved, as it is a primary documentary evidence of clients' transactions
being executed by a member of a stock exchange. In case of any dispute between them, this
can be used for the purpose of arbitration or filing claims / compensation against the member
of the stock exchange who has executed the transaction. It also serves as evidence to the
income tax authorities in verification of computations of short-term or long-term capital gains
or losses.
Buying or selling of securities of a particular company with an expectation that the prices will
increase or decrease in a span of short duration with an objective to generate income on
account of such fluctuations in price is called “Speculation”. This is an activity in which a person
assumes high risks, often without regard for the safety of his invested principal, to achieve
capital gains in a short time. Investing in securities with the intention of holding them for long
term for realizing appreciation in the value of the securities should be the aim of the investors
who wish to derive benefits from holding investments for long term.
Arbitrage means buying shares on one stock exchange at a lower rate and selling the same on
other stock exchange at a higher rate.

Activities in the Secondary Market

1. Trading of securities
2. Risk management
3. Clearing and settlement of trades
4. Delivery of securities and funds

Major entities involved in the capital market:

ENTITIES
SEBI (REGULATOR)
STOCK EXCHANGES
CLEARING CORPORATIONS (CC)/ CLEARING HOUSES (CH)
DEPOSITORIES AND DEPOSITORY PARTICIPANTS
CUSTODIANS
STOCK-BROKERS AND THEIR SUB-BROKERS
MUTUAL FUNDS
MERCHANT BANKERS
CREDIT RATING AGENCIES
FINANCIAL INSTITUTUIONS
FOREIGN INSTITUTIONAL INVESTORS
NON-BANKING INSTITUTIONS
ISSUERS/ REGISTRAR AND TRANSFER AGENTS
INVESTORS

SECONDARY MARKET & ITS OPERATIONS

The market for long term securities like bonds, equity stocks and preferred stocks is divided into
primary market and secondary market. The primary market deals with the new issues of securities.
Outstanding securities are traded in the secondary market, which is commonly known as stock
market predominantly deals in the equity shares. Debt instruments like bonds and debentures are
also traded in the stock market. Well regulated and active stock market promotes capital formation.
Growth of the primary market depends on the secondary market. The health of the economy is
reflected by the growth of the stock market.

History of Stock Exchanges in India

The origin of the stock exchanges in India can be traced back to the later half of 19th century. After
the American Civil War (1860-61) due to the share mania of the public, the number of broker’s
dealings in shares increased. The brokers organised an informal association in Mumbai named “The
Natick Stock and Share Brokers Association” in 1875.
Increased activity in trade and commerce during the First World War and Second War resulted in an
increase in the stock trading. Stock exchanges were established indifferent centre like Chennai,
Delhi, Nagpur, Kanpur, Hyderabad and Bangalore. The growth of stock exchanges suffered a
setback after the end of World War. Worldwide depression affected them. Most of the stock
exchanges in the early stages had a speculative nature of working without technical strength.
Securities and Contract Regulation Act, 1956 gave powers to the central government to regulate the
stock exchanges. The stock exchanges in Mumbai, Calcutta, Chennai, Ahmadabad, Delhi,
Hyderabad and Indore were recognised by the SCR Act. The Bangalore stock exchange was
recognised only in 1963. At present we have 23 stock exchanges and 21 of them had hardware and
software compliant to solve Y2K problem. Till recent past, floor trading took place in all the stock
exchanges.
In the floor trading system, the trade takes place through open outcry system during the official
trading hours. Trading pests are assigned for different securities where buy and sell activities of
securities took place. This system needs a face to face contact among the traders and restricts the
trading volume.
The speed of the new information reflected on the prices was rather slow. The deals were also not
transparent and the system favoured the brokers rather than the investors. The setting up of NSE
and OTCEI with the screen based trading facility resulted in more and more stock exchanges
turning towards the computer based trading. Bombay stock exchange introduced the screen based
trading system in 1995, which is known as BOLT (Bombay On-line Trading System). Madras stock
exchange introduced Automated Network Trading System (MANTRA) on Oct 7th 1996. Apart
from Bombay stock exchange, Vadodara, Delhi, Pune, Bangalore, Calcutta and Ahmadabad stock
exchanges have introduced screen based trading. Other exchanges are also planning to shift to the
screen based trading. The turnover and market share of the various stock exchanges are given in

Functions of Stock Exchange

Maintains Active Trading
Shares are traded on the stock exchanges, enabling the investors to buy and sell securities. The prices
may vary from transaction to transaction. A continuous trading increases the liquidity or
marketability of the shares traded on the stock exchanges.

Fixation of Prices
Price is determined by the transactions that flow from investors’ demand and supplier’s preferences.
Usually the traded prices are made known to the public. This helps the investors to make better
decisions.
Ensures Safe and Fair Dealing
The rules, regulations and by-laws of the stock exchanges’ provide a measure of safety to the
investors. Transactions are conducted under competitive conditions enabling the investors to get a
fair deal.
Aids in Financing the Industry
A continuous market for shares provides a favorable climate for raising capital. The negotiability and
transferability of the securities helps the companies to raise long-term funds. When it is easy to trade
the securities, investors are willing to subscribe to the initial public offerings. This stimulates the
capital formation.
Dissemination of Information
Stock exchanges provide information through their various publications. The publish the share
prices traded on daily basis along with the volume traded. Directory of Corporate information is
useful for the investors’ assessment regarding the corporate. Handouts, handbooks and pamphlets
provide information regarding the functioning of the stock exchanges.
Performance Inducer
The prices of stock reflect the performance of the traded companies. This makes the corporate
more concerned with its public image and tries to maintain good performance.
Self-regulating Organization
The stock exchanges monitor the integrity of the members, brokers, listed companies and clients.
Continuous internal audit safeguards the investors against unfair trade practices. It settles the
disputes between member brokers, investors and brokers.

Regulatory Framework
A comprehensive legal framework was provided by the
Securities Contract Regulation Act, 1956 and the Securities and Exchanges Board of India Act, 1992.
A three tire regulatory structure comprising the Ministry of Finance, the Securities and
Exchanges Board of India and the Governing Boards of the
Stock Exchanges regulate the functioning of stock exchanges.

Ministry of Finance
The stock Exchanges Division of the Ministry of Finance has powers related to the application of
the provision of the SCR Act and licensing of dealers in the other area. According to
SEBI Act, the Ministry of Finance has the appellate and supervisory powers over the SEBI. It has
power to grant recognition to the stock Exchanges and regulation of their operations. Ministry of
Finance has the power to approve the appointments of executive chiefs and nominations of the
public representatives in the Governing Boards of the stock exchanges. It has the responsibility of
preventing undesirable speculation.
The Securities and Exchange Board of India the Securities and Exchange Board of India even
though established in the year 1988, received statutory powers only on 30th Jan 1992. Under the
SEBI Act, a wide variety of powers is vested in the hands of SEBI. SEBI has the powers to regulate
the business of stock exchanges, other security markets and mutual funds. Registration and
regulation of market intermediaries are also carried out by SEBI. It has the responsibility to prohibit
the fraudulent unfair trade practices and insider dealings. Take over’s also monitored by the SEBI.
Stock Exchanges have to submit periodic and annual returns to SEBI. SEBI has the multipronged
duty to promote the healthy growth of the capital market and protect the investors.

The Governing Board

The Governing Board of the stock exchange consists of elected member directors, government
nominees and public representatives.
Rules, byelaws and regulations of the stock exchange provide substantial powers to the Executive
Director for maintaining efficient and smooth day to day functioning of the stock exchange. The
governing Board has the responsibility to maintain and orderly and well regulated market.
The governing body of the stock exchange consists of 13 members of which (a0 6 members of the
stock exchange are elected by the members of the stock exchange (b) central government nominates
not more than three members. (c) The board nominates three public representatives (d) SEBI
nominates persons not exceeding three and (e) the stock exchange appoints one Executive Director.
One third of the elected members retire at annual general meeting. The retired member can offer
himself for election if he is not elected for two consecutive years. If a member serves in the
governing body for two years consecutively, he should refrain from offering himself for another two
year. The members of the governing body elect the President and vice-president. It needs no
approval from the Central Government or the Board. The office tenure for the President and Vice-
President is one year. They can offer themselves for reelection, if they have not held office for two
consecutive years. In that case they can offer themselves for re-election after a gap of one-year
period.
The Stock Exchanges
The names of the stock exchanges are given below
Ahmadabad Stock Exchange
Bangalore Stock Exchange
Bhubaneswar Stock Exchange
Bombay Stock Exchange
Calcutta Stock Exchange
Cochin Stock Exchange
Coimbatore Stock Exchange
Delhi Stock Exchange
Guwahati Stock Exchange
Hyderabad Stock Exchange
Indore Stock Exchange
Jaipur Stock Exchange
Kanpur Stock Exchange
Ludhiana Stock Exchange
Madras Stock Exchange
Magadh Stock Exchange
Mangalore Stock Exchange
Pune Stock Exchange
Saurashtra Stock Exchange
Vadodhara Stock Exchange
N S E
OTCEI
Inter Connected Stock Exchange
Stock exchanges normally function between 10:00 a.m. and 3:45 p.m. on the working days. Badla
sessions are held on Saturdays.

Member of the Stock Exchange

The Securities Contract Regulation Act of 1956 has provided uniform regulation for the admission
of members in the stock exchanges. The qualifications for becoming a member of a recognised
stock exchange are given below.
The minimum age prescribed for the members is 21 years.
He/she should be an Indian Citizen.
He should be neither a bankrupt nor compounded with the creditors.
He should not be convicted for fraud or dishonesty.
He should not be engaged in any other business connected with a company.
He should not be a defaulter of any other stock exchange.
The minimum required educational qualification is a pass in 12th examination.
The Mumbai and Calcutta stock exchanges have set up training institutes to enable the members to
understand the complexities of the stock trading. In recent day’s highly qualified persons such as
Company secretaries, charted accountants and MBA’s are becoming members. Corporate
membership is also permitted now. The members transacting business through their appointed
members. The governing board has to approve the partnership and the appointed membership in
other stock exchanges. If he applies before the completion of five years he has to relinquish the If
membership of the present membership before accepting the other.
The Broker
A member/broker registered with the recognized stock exchange has to apply to the SEBI for
registration. Likewise a sub-broker even though he is registered with the stock exchange should
apply to SEBI for registration. Usually the agreement between the broker and the sub broker is
carried out on a non judicial stamp paper of Rs 10. The agreement generally specifies the authority
and responsibility of the broker and sub broker.
The broker has to abide by the code of conduct laid down by the SEBI. The code of conduct
prevents the malpractice, manipulation and gives other statutory requirements. If
A broker is involved in manipulation or price rigging or gives false information, his registration is
likely to be suspended. If the rules and regulations regarding insiders’ trading and take over codes are
not adhered to, the registration may even be cancelled.
Broker and the Investor
1. The broker should provide adequate information regarding the stocks.
2. The broker should be capable of giving short term and long term investment suggestions to the
investors.
3. The broker should be able to confirm the purchase and sale of the securities quickly.
4. He should be able to provide price quotes quickly, which is now possible with the computer
network.
5. The broker should be noted for his integrity. He should have a good name in the society.
6. The broker should have adequate experience in the market to take correct decision.
7. The broker should have contact with other stock exchanges to execute the order profitably.
8. The broker should also offer incidental service like arranging for financing the clients’ transaction.

Types of Orders
Buy and sell orders are placed with the members of the stock exchanges by the investors. The orders
are of different types.
Limit Orders
Orders are limited by a fixed price. ‘Buy Reliance Petroleum at Rs 50’. Here, the order has clearly
indicated the price at which it has to be bought and the investor is not willing to give more than Rs
50.
Best Rate Order
Here, the buyer or seller gives the freedom to the broker to execute the order at the best possible
rate quoted on that particular date for buying. It may be the lowest rate for buying and the highest
rate for selling.
Discretionary Order
The investor gives the range of price for purchase and sale. The broker can use his discretion to buy
within the specified limit.
Generally the approximate price is fixed. The order stands as this ‘Buy BRC 100 shares around Rs
40’.
Stop Loss Order
The orders are given to limit the loss due to unfavorable price movements in the market. A
particular limit is given for waiting.
If the price falls below the limit, the broker is authorised to sell the shares to prevent further loss.
Buying and Selling Shares
To buy and sell shares the investor has to locate a registered broker or sub broker who can render
prompt and efficient service to him. Then orders to buy or sell the specified number of shares of a
company of the investor’s choice are placed with the broker. The order may be of any of the above
mentioned type. After receiving the order, the broker tries to execute the order in his computer
terminal. Once matching order is found, the order is executed. The broker delivers the contract note
to the investors. It gives details regarding: the name of the company, number of shares bought,
price, brokerage, and date of delivery of shares. In the physical trading form, once the broker gets
the share certificate through the clearing houses he delivers the share certificate along with transfer
deed to the investor. The investor has to fill the transfer deed and stamp it.
Stamp duty is one-half percentage of the purchase consideration; the investor should lodge the share
certificate and transfer deed to the registrar or transfer agent of the company. If it is bought in the
demat form, the broker has to give a matching instruction to his depository participant to transfer
the share bought to the investors’ account. The investor should be an account holder in any of the
depository participant. In the case of sale of shares on receiving payment from the purchasing
broker, the broker effects the payment to the investor.
Share Groups
The listed shares are divided into three categories: Group a shares (specified shares) B1 shares and B
shares. The last two groups are referred to cleared securities or no-specified shares.
The shares that come under specified group can avail the carry forward transactions. In ‘A’ group,
shares are selected on the basis of equity, market capitalisation and public holding.
Further it should have a good track record and a dividend paying company. It should have good
growth potential too.
The trading volumes and the investor’s base are high in ‘A’ group share. Any company when it
satisfies these criteria would be shifted from ‘B’ group to “A” group.
In the B1 group actively traded shares are included. Carry forward transactions are not allowed in
this group. Settlement takes place through the clearing house along with the “A” group shares. The
settlement cycle and the procedure are identical to “A” group security. The rest of the company
shares listed form the B group.

Settlement Cycle
A settlement cycle consists of five days trading period within which any transaction buy/sell must be
completed. There are two types of settlement: fixed and rolling. A fixed cycle starts on a particular
day and ends after five days. For example, in the
Mumbai stock exchange the settlement cycle starts on Monday and ends of Friday. In the NSE it
starts on Wednesday of one week and ends on the Tuesday of the following week. A pay-in day and
a pay-out day follow the settlement cycle. The pay-in day refers to all the buyer brokers depositing
the money for the purchase of shares. The payout day refers to the exchange handing over the
proceeds to the seller brokers.
A settlement cycle is important for the investors and brokers. If, an investor purchases 1000 shares
of Asian Paints on Monday, to square up the position by the end of the settlement, the sale will have
to take place before Friday, the same week. If the sale has not taken place, he has to paya
consideration for the broker at the end of the settlement period. The broker collects the payments
from the clients and deposits it with the exchange on the pay-in day. The exchange allows four days,
from the end of the settlement cycle to the pay-in day to enable the brokers to collect the payments
from the clients. After found days, on the pay-out day the exchange hands over the proceeds to the
seller broker. The same trading/settlement cycle and procedure of the specified group are followed
in the “B1” non-specified group.
But no carry forward (Badla) transaction is allowed for “B1” group shares. The pay-in for B1 group
securities can be done with “A” group simultaneously under one balance sheet.
In the B group shares, clearing house handles the money and part of the transaction. Physical
delivery of securities is done by the members. In the pay-in day the balance sheet is filed Along with
cheques/drafts. Only on the payout day monetary are made by the clearings house.

LEGAL FRAMEWORK
The exigencies of the market and the flexibility of the regulators are maintained through the
exercise of delegated legislation to the regulators. Under this the regulators issue notifications,
circulars and guidelines which are to be complied by the market participants.
Various activities in the securities market in India are regulated in a coordinated manner by four
regulators namely Department of Economic Affairs (DEA) of the Ministry of Finance, Ministry of
Company Affairs, Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
(RBI).
The regulatory and the supervisory framework of the securities market in India has been
progressively strengthened through various legislative and administrative measures and is
consistent with the best international benchmarks, such as, standards prescribed by the
International Organisation of Securities Commissions (IOSCO).
Rules and Regulations
The Government has framed rules under the Securities Contract (Regulation) Act SC(R)A, SEBI
Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the
Depositories Act for registration and regulation of all market intermediaries, for prevention of
unfair trade practices, insider trading, etc. Under these Acts, Government and SEBI issue
notifications, guidelines, and circulars, which need to be complied by the market participants.
The self-regulatory organizations (SROs) like stock exchanges have also laid down their rules
and regulations for market participants.
Regulators
The regulators ensure that the market participants behave in a desired manner so that the
securities market continues to be a major source of finance for corporate and government and
the interest of investors are protected. As noted earlier, the responsibility for regulating the
securities market is shared by DEA, Ministry of Corporate Affairs, SEBI and RBI.
* This chapter only touches upon the broad regulatory framework for the Indian securities
markets, giving the main clauses of various acts, rules and regulations that have a bearing on
the functioning of the markets. For greater details, it is recommended that original acts, rules
and regulations may be referred to.

SEBI (Intermediaries) Regulations, 2008

One of the main functions of SEBI is to register and regulate the functioning of various types of
intermediaries and persons associated with securities market in a manner as to ensure smooth
functioning of the markets and protection of interests of the investors. These intermediaries, as
detailed in the SEBI Act are: stock-brokers, sub- broker, share transfer agents, bankers to an
issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers, depositories, participants, custodians of securities, foreign
institutional investors, credit rating agencies, asset management companies, clearing members
of a clearing corporation, trading member of a derivative segment of a stock exchange,
collective investment schemes, venture capital funds, mutual funds, and any other intermediary
associated with the securities market.
SEBI had issued regulations governing the registration and regulatory framework for each of
these intermediaries. However, given the fact that many requirements and obligations of most
intermediaries are common, SEBI has recently consolidated these requirements and issued the
SEBI (Intermediaries) Regulations, 2008. These regulations were notified on May 26, 2009.
These regulations apply to all the intermediaries mentioned above, except foreign institutional
investors, foreign venture capital investors, mutual funds, collective investment schemes and
venture capital funds.

The salient features of the Regulations are as under:

(a) The SEBI Regulations put in place a comprehensive regulation which is applicable to all
intermediaries. The common requirements such as grant of registration, general obligations,
common code of conduct, common procedure for action in case of default and miscellaneous
provisions are applicable for all intermediaries.
(b) The registration process has been simplified. An applicant can file application in the
prescribed format along with additional information as required under the relevant regulations
along with the requisite fees. The existing intermediaries ma y, within the prescribed time, file
the disclosure in the specified form. The disclosures are required to be made public by
uploading the information on the website specified by SEBI. The information of commercial
confidence and private information furnished to SEBI shall be treated confidential. In the event
intermediary wishes to operate in a capacity as an intermediary in a new category, such person
may only file the additional shortened forms disclosing the specific requirements of the new
category as per the relevant regulations.
(c) The Fit and Proper criteria have been modified to make it principle based.
The common code of conduct has been specified at one place.
(d) The registration granted to intermediaries has been made permanent unless surrendered by
the intermediary or suspended or cancelled in accordance with these regulations.
(e) Procedure for action in case of default and manner of suspension or cancellation of
certificate has been simplified to shorten the time usually faced by the parties without
compromising with the right of reasonable opportunity to be heard. Surrender of certificate has
been enabled without going through lengthy procedures.
(f) While common requirements will be governed by the new regulations, the intermediaries
specific requirements will continue to be as per the relevant regulations applicable to individual
intermediaries. The relevant regulations will be amended to provide for the specific
requirements.

SEBI (Prohibition of Insider Trading) Regulations, 1992

The malpractice of ’insider trading’ affects the innocent investors. In simple terms ‘insider
trading’ means selling or buying in securities on the basis of price sensitive unpublished
information of a listed corporate which if published could lead to a fall or rise in the prices of
shares of the corporate.
To tackle the problem of insider trading, SEBI issued the SEBI (Insider Trading) Regulations
1992. These regulations were further made stringent through amendments in February 2002
and they were notified as the SEBI (Insider Trading)
(Amendment) Regulations 2002.
The important definitions used in the regulations are:
(i) Dealing in securities means an act of subscribing, buying, selling or agreeing to subscribe,
buy, sell or deal in any securities by any person either as principal or agent.
(ii) Insider means any person who, is or was connected with the company or is deemed to have
been connected with the company, and who is reasonably expected to have access to
unpublished price sensitive information in respect of securities of a company, or who has
received or has had access to such unpublished price sensitive information.
(iii) A connected person means any person who:
(a) Is a director, as defined in clause (13) of section 2 of the Companies Act,
1956 of a company, or is deemed to be a director of that company by virtue of sub-clause (10)
of section 307 of that Act, or
(b) Occupies the position as an officer or an employee of the company or holds a position
involving a professional or business relationship between himself and the company whether
temporary or permanent and who may reasonably be expected to have an access to
unpublished price sensitive information in relation to that company.
(iv) A person is deemed to be a connected person if such person:
(a) Is a company under the same management or group or any subsidiary company thereof
within the meaning of section (1B) of section 370, or subsection
(11) Of section 372, of the Companies Act, 1956 or sub-clause (g) of section 2 of the Monopolies
and Restrictive Trade Practices Act, 1969 as the case may be; or
(b) Is an intermediary as specified in section 12 of SEBI Act, 1992, Investment company, Trustee
Company, Asset Management Company or an employee or director thereof or an official of a
stock exchange or of clearing house or corporation;
(c) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker,
portfolio manager, investment advisor, sub broker, investment company or an employee
thereof, or, is a member of the board of trustees of a mutual fund or a member of the board of
directors of the asset management company of a mutual fund or is an employee thereof who
have a fiduciary relationship with the company;
(d) Is a member of the board of directors, or an employee, of a public financial institution as
defined in Section 4A of the Companies Act, 1956?
(e) Is an official or an employee of a self regulatory organisation recognised or authorised by
the Board of a regulatory body;
(F) is a relative of any of the aforementioned persons;
(g) Is a banker of the company?
(h) Relative of the connected person.
(v) Price sensitive information means any information which is related directly or indirectly to a
company and which if published is likely to materially affect the price of securities of a
company. It includes only such information which if published is likely to materially affect the
price of securities of a company. The following is deemed to be price sensitive information:
(a) Periodical financial results of the company;
(b) Intended declaration of dividends (both interim and final);
(c) Issue of securities or buy-back of securities;
(d) Any major expansion plans or execution of new projects;
(e) Amalgamation, mergers or takeovers;
(f) Disposal of the whole or substantial part of the undertaking;
(g) Significant changes in policies, plans or operations of the company.
(vi)Unpublished information means information which is not published by the company or its
agents and is not specific in nature. However, speculative reports in print or electronic media
are not considered as published information.

Prohibition on Dealing, Communicating or Counseling

Under this regulation, no insider should:
(a) Either on his own behalf or on behalf of any other person, deal in securities of a company
listed on any stock exchange when in possession of any unpublished price sensitive
information;
(b) Communicate, counsel or procure, directly or indirectly, any unpublished price sensitive
information to any person who while in possession of such unpublished price sensitive
information should not deal in securities. This is however, not applicable to any communication
required in the ordinary course of business or profession or employment or under any law.
The regulations require that no company should deal in the securities of another company or
associate of that other company while in possession of any unpublished price sensitive
information.
Investigation
If SEBI suspects any person of having violated the provisions of insider regulation, it may make
inquiries with such person or with the stock exchanges, mutual funds, other persons associated
with the securities market, intermediaries and self regulatory organisation in the securities
market to form a prima facie opinion as to whether there is any violation of insider regulations.
Where SEBI forms a prima facie opinion that it is necessary to investigate and inspect the books
of accounts, either documents and records of an insider or the stock exchanges, mutual funds,
other persons associated with the securities market, intermediaries and self-regulatory
organisation in the securities market, it may appoint an investigating authority for the purpose.
The investigating authority has to submit its report to SEBI, after completion of investigations in
accordance with the provisions of the regulations.
After considering the report, SEBI is required to communicate its findings to the suspected
person and seek a reply from such person. Such suspected person is required to reply to the
findings within 21 days to SEBI. After receipt of the reply,
SEBI may take such measures to safeguard and protect the interest of investors, securities
market and for due compliance with the insider trading regulations.
SEBI also has powers to appoint an auditor to investigate into the books of accounts or the
affairs of the insider or the stock exchanges, mutual funds, other persons associated with the
securities market, intermediaries and self-regulatory organization in the securities market.

Disclosures and Internal Procedure for Prevention of Insider Trading

All listed companies and organisations associated with securities markets such as
intermediaries, asset management company, trustees of mutual funds, self regulatory
organisations recognised by SEBI, recognised stock exchanges, clearing house or corporations,
public financial institutions and professional firms such as auditors, accountancy firms, law
firms, analysts, consultants, etc., assisting or advising listed companies, are required to frame a
code of internal procedures and conduct as per the prescribed format provided in SEBI
(Prohibition of Insider Trading) Regulations without diluting it any manner and ensure
compliance of the same.
The regulations require certain disclosures to be made by directors, officers and substantial
shareholders in listed companies. These are:
(i) Initial Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed company should
disclose to the company in prescribed form, the number of shares or voting rights held by such
person, on becoming such holder, within 2 working days of:
(i) The receipt of intimation of allotment of shares; or
(ii) The acquisition of shares or voting rights, as the case may be.
(b) Any person who is a director or officer of a listed company should disclose to the company
in prescribed form, the number of shares or voting rights held by such person, within 2 working
days of becoming a director or officer of the company.

(ii) Continual Disclosure

(a) Any person who holds more than 5% shares or voting rights in any listed company should
disclose to the company in prescribed form the number of shares or voting rights held and
change in shareholding or voting rights, even if such change results in shareholding falling
below
5%, if there has been change in such holdings from the last disclosure and such change exceeds
2% of total shareholding or voting rights in the company.
(b) Any person who is a director or officer of a listed company, should disclose to the company
in prescribed form, the total number of shares or voting rights held and change in shareholding
or voting rights, if there has been a change in such holdings from the last disclosure made and
the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting
rights, whichever is lower. The disclosure mentioned above should be made within 2 working
days of:
(i) The receipt of intimation of allotment of shares, or
(ii) The acquisition or sale of shares or voting rights, as the case may be.
(iii) Disclosure by Company to Stock Exchanges
Every listed company, within two days of receipt, should disclose to all stock exchanges on
which the company is listed, the information relating to continual and initial disclosure given
above. The disclosures required under this regulation may also be made through electronic
filing in accordance with the system devised by the stock exchanges. Further, the SEBI Act,
which inter-alia, prescribes the penalty for insider trading (Section 15G), was amended in 2002
to increase the penalty for insider trading to Rs 25 crore or three times the amount of profits
made out of insider trading, whichever is higher.

SEBI (Prohibition of fraudulent and Unfair Trade Practices relating to securities

market) Regulations, 2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market
manipulation and fraudulent and unfair trade practices. The regulations specifically prohibit
market manipulation, misleading statements to induce sale or purchase of securities, unfair
trade practices relating to securities. The important terms defined under the regulations are:
(i) Fraud includes any act, expression, omission or concealment committed whether in a
deceitful manner or not by a person or by any other person or his agent while dealing in
securities in order to induce another person with his connivance or his agent to deal in
securities, whether or not there is any wrongful gain or avoidance of any loss, and should also
include:
(a) A knowing misrepresentation of the truth or concealment of material fact in order that
another person may act to his detriment;
(b) A suggestion as to a fact which is not true by one who does not believe it to be true;
(c) An active concealment of a fact by one having knowledge or belief of the fact;
(d) A promise made without any intention of performing it;
(e) A representation made in a reckless and careless manner whether it is true or false;
(f) Any such act or omission as any other law specifically declares to be fraudulent;
(g) Deceptive behaviour by a person depriving another of informed consent or full participation;
(h) A false statement made without reasonable ground for believing to be true;
(i) The act of an issuer of securities giving out misinformation that affects the market price of
the security, resulting in investors being effectively misled even though they did not rely on the
statement itself or anything derived from it other than the market price.
The term “fraudulent” should be construed accordingly. Nothing contained in this clause is
applicable to any general comments made in good faith in regard to the economic policy of the
Government; the economic situation of the country; trends in the securities market; any other
matter of a like nature.
(ii) Dealing in Securities is defined to include an act of buying, selling or subscribing pursuant to
any issue of any securities or agreeing to buy, sell or subscribe to any issue of any securities or
otherwise transacting in any way in any security by any person as principal, agent or
intermediary as defined under the SEBI
Act.
Prohibition of Certain Dealings in Securities
The regulation provides that no person should directly or indirectly:
(a) Buy, sell or otherwise deal in securities in a fraudulent manner;
(b) Use or employ, in connection with issue, purchase or sale of any security listed or proposed
to be listed in a recognised stock exchange, any manipulative or deceptive device or
contrivance in contravention of the provisions of the Act or the rules or the regulations made
There under;
(c) Employ any device, scheme or artifice to defraud in connection with dealing in or issue of
securities which are listed or proposed to be listed on a recognised stock exchange;
(d) Engage in any act, practice, and course of business which operates or would operate as
fraud or deceit upon any person in connection with any dealing in or issue of securities which
are listed or proposed to be listed on a recognised stock exchange in contravention of the act,
rules and regulations.

Prohibition of Manipulative, Fraudulent and Unfair Trade Practices

The Regulation provides that no person should indulge in a fraudulent or an unfair trade
practice in securities. Any dealing in securities is deemed to be fraudulent or an unfair trade
practice if it involves fraud and may include all or any of the following:
(a) Indulging in an act which creates false or misleading appearance of trading in the securities
market;
(b) Dealing in a security not intended to effect transfer of beneficial ownership but intended to
operate only as a device to inflate, depress or cause fluctuations in the price of such security for
wrongful gain or avoidance of loss;
(c) Advancing or agreeing to advance any money to any person thereby inducing any other
person to offer to buy any security in any issue only with the intention of securing the minimum
subscription to such issue;
(d) Paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money
or money’s worth for inducing such person for dealing in any security with the object of
inflating, depressing, maintaining or causing fluctuation in the price of such security;
(e) Any act or omission amounting to manipulation of the price of a security;
(f) Publishing or causing to publish or reporting or causing to report by a person dealing in
securities any information which is not true or which he does not believe to be true prior to or
in the course of dealing in securities.
(g) Entering into a transaction in securities without intention of performing it or without
intention of change in ownership of such security.
(h) Selling, dealing or pledging of stolen or counterfeit security whether in physical or
dematerialized form.
(i) An intermediary promising a certain price in respect of buying or selling of a security to a
client and waiting till a discrepancy arises in the price of such security and retaining the
difference in prices as profit for himself.
(j) An intermediary providing his clients with such information relating to a security as cannot
be verified by the clients before their dealing in such security.
(k) An advertisement that is misleading or that contains information in a distorted manner and
which may influence the decision of the investors.
(l) An intermediary reporting trading transactions to his clients entered into on their behalf in
an inflated manner in order to increase his commission and brokerage.
(m) An intermediary not disclosing to his client transactions entered into on his behalf including
taking an option position.
(n) Circular transactions in respect of a security entered into between intermediaries in order to
increase commission to provide a false appearance of trading in such security or to inflate,
depress or cause fluctuations in the price of such security.
(o) Encouraging the clients by an intermediary to deal in securities solely with the object of
enhancing his brokerage or commission.
(p) An intermediary predating or otherwise falsifying records such as contract notes.
(q) An intermediary buying or selling securities in advance of a substantial client order or
whereby a futures or option position is taken about an impending transaction in the same or
related futures or options contract.
(r) Planting false or misleading news which may induce sale or purchase of securities.
LEARNING EXPERIENCE

The first thing that I have learned is, I have knowledge of “capital market”. I also come to know
the working of Ludhiana stock exchange i.e. how the different departments are performing
their jobs successfully. It was a wonderful experience interacting with different people and
simultaneously enhancing my knowledge and skills about stock market operators. Ludhiana
stock exchange also provides practical training under sub brokers. I also come to know about
how on –live trading is done, how shares are bought and sold. I also learned that how to work
under the stock exchange. The working culture of Ludhiana stock exchange is quite good. Under
the training education department, the higher authorities of LSE conduct the Training Exam and
Viva before providing training certificate. It is very good experience in Ludhiana stock exchange.
CONCLUSION:

Securities market plays an important role. The capital market deals with long term securities
which have a maturity period of above one year. A market in which individuals and institutions
trade financial securities. Organization /institution in the public and private sectors also often
sell securities on capital markets in order to raise funds. Thus, type of market is composed of
entering a derivative market is called hedgers, and those who increase risks are called
speculators.