CHAPTER CONTENT PAGE

NO
1 INTRODUCTION OF SECURITIES MARKET IN INDIA

 INTRODUCTION
 SECURITIES MARKET AND FINACIAL SYSTEM
 STRUCTURE OF MARKET
2 PRIMARY MARKET

 INTRODUCTION
 FUNCTION
 FEATURES
3 SECONDARY MARKET

 INTRODUCTION
 FUNCTION
 FEATURES
4 EQUITY MARKET AND MONEY MARKET

1 EQUITY MARKET

2 MONEY MARKET

5 GOVERNMENT SECURITIES MARKET

 MEANING
 PRIMARY MARKET
 SECONDARY MARKET
6 DERIVATIES MARKET

7 REGULATORY FRAMEWORK
8 CONCLUSION
9 LIMITATION

 BIBLIOGRAPHY
 QUESTIONNAIRE
 CHAPTER 1
INTRODUCTION OF SECURITIES MARKET IN INDIA

1.1 INTRODUCTION

Securities markets are markets in financial assets or instruments and these are
represented as I.O.Us (I owe you) in financial form. These are issued by business
organizations, corporate units and the Governments, Central or State. Public
sector undertakings also issue these securities. These securities are used to
finance their investment and current expenditure. These are thus sources of
funds to the issuers. There are different types of business organizations in India,
namely, partnership firms, cooperative societies, private and public limited
companies and joint and public sector, organizations etc.

1.2 WHAT ARE SECURITIES?

Securities are claims on money and are like promissory notes or I.O.U. Securities
are a source of funds for companies, Govt. etc. There are two types of sources of
funds namely internal and external and securities emerge when funds are raised
from external sources.
The external sources of funds of the companies are as follows:

(A) Long-term Funds

(i) Ownership capital – equity and preference capital, and Non-voting Shares.
(ii) Debt Capital – debentures and long-term borrowings in the form of deposits
from public or credit limits or advances from banks and financial institutions, etc.

(B) Short-term Funds

(i) Borrowings from banks, and other corporates.
(ii) Trade credits and suppliers credits etc.
Of the above sources, the most popular are those which are tradable and
transferable. They have a market and their liquidity is ensured, as in the case of
equity shares, preference shares, debentures and bonds. Of these the
ownership instruments, particularly the equity shares, are generally the most
 liquid as they are not only tradable in the securities markets but also enjoy the
prospects of capital appreciation, in addition to dividends. The market for these
has thus grown much faster than for others

CHARACTERISTICS OF SECURITIES

 The major characteristics of securities are their transferability and

marketability. These help the process of trading and investment in them.
Under the Indian Companies Act, Sections 82 and 111 deal with the
transfer of shares
 In the case of public limited companies, the objective of the Companies Act
as also of the Listing Agreement with the Stock Exchanges is to ensure free
and unfettered transfer of shares. Under Section 82 of the Companies Act,
shares are treated as any movable property.
 As any right to property, these are freely transferable. By one amendment
in 1985, Section 22(A) of the Securities Contracts (Regulation) Act has
denied the right to refuse to transfer shares by a public limited company
except on technical grounds.
 The other grounds on which the transfer can be refused are specifically laid
down under the Act and the company has to specify the reasons for such
refusal to transfer and reference has to be made to the Company Law
Board whose decision to refuse or not to refuse the transfer of shares will
be final.
 Thus the essential characteristic of transferability of shares is well
preserved which gives them the market which in turn extends liquidity to
these shares. This has led to the emergence of securities markets in India.

1.3 SECURITIES MARKET AND FINACIAL SYSTEM

The securities market has two interdependent and inseparable segments, the new
issues (primary market) and the stock (secondary) market.

1.3.1 PRIMARY MARKET

The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; government as well as
corporates, to raise resources to meet their requirements of investment and/or
discharge some obligation. They may issue the securities at face value, or at a
discount/premium and these securities 15 may take a variety of forms such as
equity, debt etc. They may issue the securities in domestic market and/or
international market. The primary market issuance is done either through public
issues or private placement. A public
Issue does not limit any entity in investing while in private placement, the
issuance is done to select people. In terms of the Companies Act, 1956, an issue
becomes public if it results in allotment to more than 50 persons. This means an
issue resulting in allotment to less than 50 persons is private placement. There
are two major types of issuers who issue securities. The corporate entities issue
mainly debt and equity instruments (shares, debentures, etc.), while the
governments (central and state governments) issue debt securities (dated
securities, treasury bills).The price signals, which subsume all information about
the issuer and his business including associated risk, generated in the secondary
market, help the primary market in allocation of funds.

1.3.2 SECONDARY MARKET

Secondary market refers to a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the Stock
Exchange. Majority of the trading is done in the secondary market. Secondary
market comprises of equity markets and the debt markets.

The secondary market enables participants who hold securities to adjust their
holdings in response to changes in their assessment of risk and return. They also
sell securities for cash to meet their liquidity needs. The secondary market has
further two components, namely the over-the-counter (OTC) market and the
exchange-traded market. OTC is different from the market place provided by the
Over The Counter Exchange of India Limited. OTC markets are essentially informal
markets where trades are negotiated. Most of the trades in government securities
are in the OTC market. All the spot trades where securities are traded for
immediate delivery and payment take place in the OTC market. The exchanges do
not provide facility
For spot trades in a strict sense. Closest to spot market is the cash market where
settlement takes place after some time. Trades taking place over a trading cycle,
i.e. a day under rolling settlement, are settled together after a certain time
(currently 2 working days). Trades executed on the National Stock Exchange of
India Limited (NSE) are cleared and settled by A clearing corporation which
provides novation and settlement guarantee. Nearly 100% of the trades settled by
delivery are settled in demant form. NSE also provides a formal trading platform
for trading of a wide range of debt securities including government securities.

1.3.3 Stock Market Indicators

The most commonly used indicator of stock market development is the size of the
market measured by stock market capitalization (the value of listed shares on the
country’s exchanges) to GDP ratio. This ratio has improved significantly in India in
recent years.

1.4 STRUCTURE OF MARKET

The structure of securities market

Securities market

Industrial securities market Government securities

market

New issue market Secondary market Over-the-counter market

Organised stock exchange OTC New issue

Secondary
market market
market

Bonds Equities preference shares

 CHAPTER 2

PRIMARY MARKET

INTRODUCTION

The primary market is the part of the capital market that deals with issuing of new
securities. Primary markets create long term instruments through which
corporate entities raise funds from the capital market.
In a primary market, companies, governments or public sector institutions can
raise funds through bond issues and corporations can raise capital through the
sale of new stock through an initial public offering (IPO). This is often done
through an investment bank or finance syndicate of securities dealers. The
process of selling new shares to investors is called underwriting. Dealers earn a
commission that is built into the price of the security offering, though it can be
found in the prospectus.
Instead of going through underwriters, corporations can make a primary issue of
its debt or stock, which involves the issue by a corporation of its own debt or new
stock directly to institutional investors or the public or it can seek additional
capital from existing shareholders.
Once issued the securities typically trade on a secondary market such as a stock
exchange, bond market or derivatives exchange.

2.1 FUNCTION

1. Origination

In primary market, origination means to investigate, evaluate and procedure new

project proposals. It initiates before an issue is present in the market. It is done
with the help of merchant bankers.

The merchant bankers can be

 banks,
 financial institutions,
 Private investment firms, etc.
In primary market, the preliminary investigation involves a detailed study of
economic, financial, legal, technical aspects to ensure the soundness of the
project. The second function is performed by sponsoring institutions. They
provide advisory service.

Advisory service includes

 Types of issue,
 Thug,
 Pricing,
 Methods of issue, etc.

2. Underwriting

In primary market, to ensure success of new issue, there is a need for

underwriting firms. The company needs to appoint underwriters. They can be
banks or financial institutions or specialized underwriting firms.

In primary market, underwriting can be done by a single underwriter or by a

group of underwriters. Minimum subscription is guaranteed by underwriters. If
the issue is completely subscribed, no liability would be left for the underwriters.
If by chance any part of the issue remains unsold, afterwards the underwriter has
no option, rather than buying all the unsubscribed shares.

3. Distribution

In primary market, the success of any grand new issue is hinges on the issue is
being subscribed by the people. The sale of the securities to the supreme or
highest investors is termed as distribution.

Distribution Job is given to brokers and dealers. The brokers or agents maintain
direct contact with the supreme investors.
2.2 FEATURES

The main features of primary markets are:

 This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore, it is also
called the new issue market (NIM).
 In a primary issue, the securities are issued by the company directly to
investors.
 The company receives the money and issues new security certificates to the
investors.
 Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating capital
formation in the economy.
 The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions. Borrowers in
the new issue market may be raising capital for converting private capital into
public capital; this is known as "going public."
 CHAPTERE 3

SECONDARY MARKET

3.1 INTRODUCTION

The secondary market is where investors buy and sell securities they already own.
It is what most people typically think of as the "stock market," though stocks are
also sold on the primary market when they are first issued. The national
exchanges, NSE OR BSE and the NASDAQ are secondary markets.

3.2 FUNCTION

1. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply
factors. The securities of profitable and growth oriented companies are valued
higher as there is more demand for such securities. The valuation of securities is
useful for investors, government and creditors. The investors can know the value
of their investment, the creditors can value the creditworthiness and government
can impose taxes on value of securities.

2. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange
authorities include the companies names in the trade list only after verifying the
soundness of company. The companies which are listed they also have to operate
within the strict rules and regulations. This ensures safety of dealing through
stock exchange.
3. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This
process of disinvestment and reinvestment helps to invest in most productive
investment proposal and this leads to capital formation and economic growth.

4. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating
new issues, better trading practices and by educating public about investment.

5. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits
healthy speculation of securities.

6. Liquidity:
The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to
investors that their investment can be converted into cash whenever they want.
The investors can invest in long term investment projects without any hesitation,
as because of stock exchange they can convert long term investment into short
term and medium term.

7. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are
actively traded so such companies can easily raise fresh capital from stock market.
The general public hesitates to invest in securities of loss making companies. So
stock exchange facilitates allocation of investor’s fund to profitable channels.

8. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various
securities. These attractive opportunities encourage people to save more and
invest in securities of corporate sector rather than investing in unproductive
assets such as gold, silver, etc.
3.3 FEATURES

(1) It Creates Liquidity:

The most important feature of the secondary market is to create
liquidity in securities. Liquidity means immediate conversion of
securities into cash. This job is performed by the secondary market.
(2) It Comes after Primary Market:
Any new security cannot be sold for the first time in the secondary
market. New securities are first sold in the primary market and
thereafter comes the turn of the secondary market.
(3) It has a Particular Place:
The secondary market has a particular place which is called Stock
Exchange. However, it must be noted that it is not essential that all
the buying and selling of securities will be done only through stock
exchange. Two individuals can buy or sell them mutually. This will
also be called a transaction of the secondary market. Generally,
most of the transactions are made through the medium of stock
exchange.
(4) It Encourages New Investment:
The rates of shares and other securities often fluctuate in the share
market. Many new investors enter this market to exploit this
situation. This leads to an increase in investment in the industrial
sector of the country.
 CHAPTER 4

EQUITY MARKET AND MONEY MARKET

1. EQUITY MARKET

1.1What is the Equity Market

The market in which shares are issued and traded, either through exchanges

or over-the-counter markets. Also known as the stock market, it is one of the
most vital areas of a market economy because it gives companies access
to capital and investors a slice of ownership in a company with the potential to
realize gains based on its future performance.

2.2 Stock Exchanges

The place where stocks in the equity market are traded is the stock exchange.
There are many stock exchanges around the world, and they can be either
physical places or virtual gathering spots. NASDAQ is an example of a virtual
trading post, in which stocks are traded electronically through a network of
computers. Electronic stock exchanges often include a market maker, which is a
broker-dealer company that both buys and sells stocks in order to facilitate
trading for a particular stock. This comes at a risk to the company, but it makes
the exchange process for a given stock operate more smoothly. Electronic trading
posts are becoming more common and a preferred method of trading over
physical exchanges.

3.4 Trading in the Equity Market

In the equity market, investors bid for stocks by offering a certain price, and
sellers ask for a specific price. When these two prices match, a sale occurs. Often,
there are many investors bidding on the same stock. When this occurs, the first
investor to place the bid is the first to get the stock. When a buyer will pay any
price for the stock he or she is buying at market value similarly when a seller will
take any price for the stock he or she is selling at market value.

Companies sell stocks in order to get capital to grow their businesses. When a

company offers stocks on the market, it means the company is publicly traded,
and each stock represents a piece of ownership. This appeals to investors, and
when a company does well, its investors are rewarded as the value of their stocks
rise. The risk comes when a company is not doing well and its stock value may fall.
Stocks can be bought and sold easily and quickly and the activity surrounding a
certain stock impacts its value. For example, when there is high demand to invest
in the company the price of the stock tends to rise and when many investors want
to sell their stocks the value goes down.

This market can be split into two main sectors: the primary and secondary
market. The primary market is where new issues are first offered, and stocks and
bonds are issued directly from the company. Any subsequent trading takes place
in the secondary market in which proceeds from the stock go to the investors not
the company directly. Stock exchanges such as BSE or NSE are examples of
secondary markets.

3.5 Who Works on the EQUITY Market?

There are many different players associated with the stock market,
including stockbrokers, traders, stock analysts, portfolio managers and
investment bankers. Each has a unique role, but many of the roles are intertwined
and depend on each other to make the market run effectively.

3.6 Why is the Stock Market Important?

The stock market allows companies to raise money by offering stock shares
and corporate bonds. It lets investors participate in the financial achievements of
the companies, making money through the dividends essentially, cuts of the
company's profits the shares pay out and by selling appreciated stocks at a profit,
or capital gain Of course, the downside is that investors can lose money if the
share price falls or depreciates, and the investor has to sell the stocks at a loss.

3.7 THE BSE OR NSE

 Most of the trading in the Indian stock market takes place on its two stock
exchanges: the Bombay Stock Exchange (BSE) and the National Stock
Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the
other hand, was founded in 1992 and started trading in 1994. However, both
exchanges follow the same trading mechanism, trading hours, settlement
process, etc.

3.8 Trading Mechanism

Trading at both the exchanges takes place through an open electronic limit

order book, in which order matching is done by the trading computer. There
are no market makers or specialists and the entire process is order-driven,
which means that market orders placed by investors are automatically
matched with the best limit orders. As a result, buyers and sellers remain
anonymous. The advantage of an order driven market is that it brings
more transparency, by displaying all buy and sell orders in the trading system.
However, in the absence of market makers, there is no guarantee that orders
will be executed.

All orders in the trading system need to be placed through brokers, many of

which provide online trading facility to retail customers. Institutional
investors can also take advantage of the direct market access (DMA) option, in
which they use trading terminals provided by brokers for placing orders
directly into the stock market trading system.

3.9 FEATURES

1. Low Volumes, high net purchase patterns, suggesting a strategy based on long
holding periods.

2. the less volatile component of portfolio flows.

3. Equity investors put emphasis on equity valuation e.g. knowledge base, the
depth and the movement of the equity market.

4. Equity investors are more attracted by floating exchange rates – fixed or stable
exchange rates tend to overtime undermine competitiveness and hence
profitability leading to reduced returns on equity investments.
2. MONEY MARKET

INDIAN MONEY MARKET

2.1 Meaning

The Money Market is a market for lending and borrowing of short-term funds. It
deals in funds and financial instruments having a maturity period of one day to
one year. It covers money and financial assets that are close substitutes for
money. The instruments in the money market are of short term nature and highly
liquid.

2.2 Structure of Indian money market

The Indian money market consists of two segments, namely organized sector and
unorganized sector. The RBI is the most important constituents of Indian money
market. The organized sector is within the direct purview of RBI regulation. The
unorganized sector comprises of indigenous bankers, money lenders and
unregulated non-banking financial institutions.

• Call and Notice Money Market • Indigenous Bankers

• Treasury Bills Market • Money Lenders

• Commercial Bills Market • Unregulated Non-Bank Financial

• Market for Certificates of Deposits (CDs) • Intermediaries (Chit Funds,

Nidhis and Loan Companies)

• Market for Commercial Papers (CPs) • Finance Brokers

• Repos Market

• Money Market Mutual Funds (MMMFs)

• Discount & Finance House of India (DFHI)

A) Organized Money Market

1. Call and Notice Money Market: Under call money market, funds are transacted
on overnight basis. Under notice money market funds are transacted for the
period between 2 days and 14 days. The funds lent in the notice money market do
not have a specified repayment date when the deal is made. The lender issues a
notice to the borrower 2-3 days before the funds are to be paid. On receipt of this
notice, the borrower will have to repay the funds within the given time. Generally,
banks rely on the call money market where they raise funds for a single day.

2. Treasury Bills (T-Bills): Treasury bills are short-term securities issued by RBI on
behalf of Government of India. They are the main instruments of short term
borrowing by the Government. They are useful in managing short-term liquidity.
At present, the Government of India issues three types of treasury bills through
auctions, namely – 91 days, 182-day and 364-day treasury bills. There are no
treasury bills issued by state governments. With the introduction of the auction
system, interest rates on all types of TBs are being determined by the market
forces.

3. Commercial Bills: Commercial bill is a short-term, negotiable, and self-

liquidating instrument with low risk. They are negotiable instruments drawn by a
seller on the buyer for the value of goods delivered by him. Such bills are called
trade bills. When trade bills are accepted by commercial banks, they are called
commercial bills. If the seller gives some time for payment, the bill is payable at
future date.

4. Certificates of Deposits (CDs): CDs are unsecured, negotiable promissory notes

issued at a discount to the face value. They are issued by commercial banks and
development financial institutions. CDs are marketable receipts of funds
deposited in a bank for a fixed period at a specified rate of interest.

5. Commercial Papers (CPs): Commercial Paper (CP) is an unsecured money

market instrument issued in the form of a promissory note with fixed maturity.
They indicate the short-term obligation of an issuer. They are quite safe and
highly liquid. They are generally issued by the leading, nationally reputed, highly
rates and credit worthy large manufacturing and finance companies is the public
as well as private sector.

6. Repos: A repo or reverse repo is a transaction in which two parties agree to sell
and repurchase the same security. Under repo, the seller gets immediate funds by
selling specified securities with an agreement to repurchase the same at a
mutually decided future date and price. Similarly, the buyer purchases the
securities with an agreement to resell the same to the seller at an agreed date
and price.

7. Discount and Finance House of India (DFHI): It was set up by RBI in April 1988
with the objective of deepening and activating money market. It is jointly owned
by RBI, public sector banks and all India financial institutions which have
contributed to its paid up capital.

8. Money Market Mutual Funds (MMMFs): RBI introduced MMMFs in April 1992
to enable small investors to participate in the money market. MMMFs mobilizes
savings from small investors and invest them in short-term debt instruments or
money market instruments such as call money, repos, treasury bills, CDs and CPs.
These instruments are forms of debt that mature in less than a year.

B) UNORGANIZED SECTOR OF INDIAN MONEY MARKET

1. Indigenous Bankers: They Are Financial Intermediaries Which Operate As

Banks, Receive Deposits And Give Loans And Deals In Hundies. The Hundi Is A
Short Term Credit Instrument. It Is The Indigenous Bill Of Exchange. The Rate Of
Interest Differs From One Market To Another And From One Bank To Another.
They Do Not Depend On Deposits Entirely, They May Use Their Own Funds.

2. Money Lenders: They Are Those Whose Primary Business Is Money Lending.
Money Lenders Predominate In Villages. However, They Are Also Found In Urban
Areas. Interest Rates Are Generally High. Large Amount Of Loans Are Given For
Unproductive Purposes. The Borrowers Are Generally Agricultural Labourers,
Marginal And Small Farmers, Artisans, Factory Workers, Small Traders, Etc.

3. Unregulated Non-Bank Financial Intermediaries: Theconsist Of Chit Funds,

Nithis, Loan Companies And Others.

(A) Chit Funds: They Are Saving Institutions. The Members Make Regular
Contribution To The Fund. The Collected Funds Is Given To Some Member Based
On Previously Agreed Criterion (By Bids Or By Draws).

(B) Nidhis: They Deal With Members And Act As Mutual Benefit Funds. The
Deposits From The Members Are The Major Source Of Funds And They Make
Loans To Members At Reasonable Rate Of Interest For The Purposes Like House
Construction Or Repairs.

4. Finance Brokers: They Are Found In All Major Urban Markets Specially In Cloth
Markets, Grain Markets And Commodity Markets. They Are Middlemen Between
Lenders And Borrowers.
 CHAPTER 5

GOVERNMENT SECURITIES MARKET

5.1 MEANINIG :-

The debt market in India comprises of two main segments, viz., the government
securities market and the corporate securities market. The market for
government securities is the most dominant part of the debt market in terms of
outstanding securities, market capitalisation, trading volume and number of
participants. It sets benchmark for the rest of the market.
The short-term instruments in this segment are used by RBI as instrument of
monetary policy. The main instruments in the government securities market are
fixed rate bond, floating rate bonds, zero coupon bonds and inflation index bonds,
partly paid securities, securities with embedded derivatives, treasury bills and the
state government bonds.

5.2PRIMARY MARKERT

 Process-Government securities
The issue of government securities is governed by the terms and conditions
specified in the general notification of the government and also the terms and
conditions specified in the specific notification issued in respect of issue of each
security.
The terms and conditions specified in the general notification are discussed in this
section Any person including firm, company, corporate body, institution, state
government, provident fund, trust, NRI, OCB predominantly owned by NRIs and
FII registered with SEBI and approved by RBI can submit offers, including in
electronic form, for purchase of government securities.

Government issues securities through the following modes:

 Issue of securities through auction: The securities are issued through
auction either on price basis or on yield basis. Where the issue is on price
basis, the coupon is pre-determined and the bidders quote price per Rs.100
face value of the security,at which they desire to purchase the security.
Where the issue is on yield basis, the coupon of the security is decided in an
auction and the security carries the same coupon till maturity On the basis
of the bids received, RBI determines the maximum rate of yield or the
minimum offer price as the case may be at which offers for purchase of
securities would be accepted at the auction.

 Issue of securities with pre-announced coupon rates: The coupon on such

securities is announced before the date of floatation and the securities are
issued at par. In case the total subscription exceeds the aggregate amount
offered for sale, RBI may make partial allotment to all the applicants.

 Issue of securities through tap sale: No aggregate amount is indicated in the

notification in respect of the securities sold on tap. Sale of such securities
may be extended to more than one day and the sale may be closed at any
time on any day.

 Issue of securities in conversion of maturing treasury bills/dated securities:

The holders of treasury bills of certain specified maturities and holders of
specified dated securities are provided an option to convert their holding at
specified prices into new securities offered for sale. The new securities
could
be issued on an coupon basis.

Government issues the following types of Government securities:

(a) Securities with fixed coupon rates: These securities carry a specific coupon rate
remaining fixed during the term of the security and payable periodically.These
may be issued at a discount, at par or at a premium to the face value
and are redeemed at par.

(b) Floating Rate Bonds:These securities carry a coupon rate which varies
according
to the change in the base rate to which it is related. The description of the base
rate the manner in which the coupon rate is linked to it is announced in the
specific notification. The coupon rate may be subject to a floor or cap.

(c) Zero Coupon Bonds: These are issued at a discount and redeemed at par. No
interest payment is made on such bonds before maturity. On the basis of the bids
received through tenders, RBI determines the cut-off price at which tenders for
purchase such bonds would be accepted at the auction.

(d) Securities with Embedded Derivatives: These securities are repaid at the
option
of government/holder of the security, before the specified redemption date,
where a 136 call option’/‘put option’ is specified in the specific notification and
repaid on the date of redemption specified in the specific notification, where
neither a ‘call option’ nor a put option’ is specified/ exercised.

(e) Indexed Bond: Interest payments of these bonds are based on Wholesale Price
Index/ Consumer Price Index.

5.3 Secondary market

Trading of Government Securities on Stock Exchanges :

With a view to encouraging wider participation of all classes of investors,

including retail,trading in government securities through a nationwide,
anonymous, order driven screen based trading system on stock exchanges and
settlement through the depositories, in the 138 same manner in which trading
takes place in equities, has been introduced with effect from January 16, 2003.
Accordingly, trading of dated Government of India (GOI) securities in
dematerialized form has started on automated order driven system of the
National Stock Exchange (NSE), The Bombay Stock Exchange, Mumbai (BSE) and
the Over the Counter Exchange of India (OTCEI).

Repo and Reverse Repo :

Repo or Repurchase Agreements are short-term money market instruments. Repo
is nothing but collateralized borrowing and lending through sale/purchase
operations in debt instruments. Under a repo transaction, a holder of securities
sells them to an investor with an agreement to repurchase at a predetermined
date and rate. In a typical repo transaction, the counterparties agree to exchange
securities and cash, with a simultaneous agreement to reverse the transactions
after a given period. To the lender of cash, the securities lent by the borrower.
serves as the collateral to the lender of securities, the cash borrowed by the
lender serves as the collateral. Repo thus represents a collateralized short term
lending.
A reverse repo is the mirror image of a repo. When one is doing a repo, it is
reverse repo for the other party. For, in a reverse repo, securities are acquired
with a simultaneous commitment to resell.

Trading Mechanism:
The trades on the WDM segment can be executed in the Continuous or
Negotiated market. In the continuous market, orders entered by the trading
members are matched by the trading system on time price priority. For each
order entering the trading system, the system scans for a probable match in the
order books. On finding a match, a trade takes place. In case the order does not
find a suitable counter order in the order books, it is stored in the order books as
a passive order. This could later match with any future order entering the order
book and result into a trade. This future order, which results in matching of an
existing order, is called the active order. In the negotiated market, deals are
negotiated outside the exchange between the two counter parties and are
reported on the trading system for approval.

The WDM trading system recognises three types of users-Trader, Privileged and
Inquiry.Trading Members can have all the three user types whereas Participants
are allowed privilege 146 and inquiry users only. The user-id of a trader gives
access for entering orders on the trading system. The privileged user has the
exclusive right to set up counter party exposure limits.The Inquiry user can only
view the market information and set up the market watch screen but cannot
enter orders or set up exposure limits.

Maximum Brokerage & Transaction Charges in Government Securities:

In light of the recent fraudulent transactions in the guise of government securities
transactions in physical format, RBI decided to accelerate the measures for
further reducing the scope for trading in physical form.

The measures are as follows:

(i) For banks which do not have SGL account with RBI, only one CSGL account can
be
opened.

(ii) In case the CSGL accounts are opened with a scheduled commercial bank, the
account
holder has to open a designated funds account (for all CSGL related transactions)
with the same bank.

(iii) The entities maintaining the CSGL/designated funds accounts will be required
to
ensure availability of clear funds in the designated funds accounts for purchases
and of sufficient securities in the CSGL account for sales before putting through
the
transactions.

(iv) No further transactions by the bank should be undertaken in physical form

with any broker with immediate effect.

(v) Banks should ensure that brokers approved for transacting in Government
securities are registered with the debt market segment of NSE/BSE/OTCEI.

(vi) It should also be ensured that users of NDS deal directly on the system and
use the system for transactions on behalf of their clients.
 Chapter 6

Derivative market

6.1 Derivative market: -

The derivatives markets are the financial markets for derivatives. The market can
be divided into two, that for exchange traded derivatives (ETD) and that for over-
the-counter derivatives(OTC).

6.2 Introduction of derivatives:-

The word “DERIVATIVES” is derived from the word itself derived of an underlying
asset. It is a future image or copy of an underlying asset which may be shares,
stocks, commodities, stock index, etc.
For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. Such a transaction is an
example of a derivative. The price of this derivative is driven by the spot price of
wheat which is the "underlying".

6.3 Aims and objectives of derivatives:-

1. To explore the derivative market in India.

2. To know what derivatives are available in India.

3. To know derivatives trading mechanism of exchanges.

4. To become aware of what strategies are followed by Indian Investors.

5. To know how derivatives are used in covering risk

6. To know how derivatives give a safe exposure.

6.4 Need for derivative market:-

1. They help in transferring risks from risk averse people to risk oriented people.

2. They help in the discovery of future as well as current prices.

3. They catalyze entrepreneurial activity.

4. They increase the volume traded in markets because of participation of risk

adverse people in greater numbers.

5. They increase savings and investment in the long run.

6.5 Purpose and benefits of derivative market:-

1. Today's sophisticated international markets have helped foster the rapid

growth in
Derivative instruments. In the hands of knowledgeable investors, derivatives can
derive profit from Changes in interest rates and equity markets around the world.
Changes in price of assets.

2. Help of hedge against inflation and deflation, and generate returns that are not
correlated with more traditional investments. The two most widely recognized
benefits attributed to
derivative instruments are price discovery and risk management and others.

3. Price discovery: -
The kind of information and the way people absorb it constantly changes the
price of a commodity. This process is known as price discovery. the price of all
future contracts serve as prices that can be accepted by those who trade the
contracts in lieu of facing the risk of uncertain future prices.

4. Risk management: -
This could be the most important purpose of the derivatives market.
Risk management is the process of identifying the desired level of risk, identifying
the actual level of risk and altering the latter to equal the former. This process can
fall into the categories of hedging and speculation.

5. Derivatives help in transferring risks from risk-averse people to risk-oriented

people.

6. By allowing transfer of unwanted risks, derivatives can promote more efficient

allocation of capital across the economy and thus, increasing productivity in the
economy.

7. Derivatives increase the volume traded in markets because of participation of

risk-averse people in greater numbers.

6.6 Factors driving the growth of derivatives:-

Over the last three decades, the derivatives market has seen a phenomenal
growth. A large variety of derivative contracts have been launched at exchanges
across the world.

1. Increased volatility in asset prices in financial markets.

2. Increased integration of national financial markets with the international

markets.

3. Marked improvement in communication facilities and sharp decline in their

costs.

4. Development of more sophisticated risk management tools, providing

economic
agents a wider choice of risk management strategies.
5. Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets leading to higher returns, reduced
risk as well as transactions costs as compared to individual financial assets.

6.7 Derivative market is divided in two markets:-

Derivative
market

Over the counter

Exchange traded
(OTC)
6.8 Over the counter:-

Over the counter derivatives are contracts that are traded and privately
negotiated directly between two parties, without going through an exchange or
other intermediary. Products such as swaps and forward rate agreements are
almost always traded in this way. The OTC derivative market is the largest market
for derivatives, and is largely unregulated with respect to disclosure of
information between the parties, since the OTC market is made up of banks and
other highly sophisticated parties.
Because OTC derivatives are not traded on an exchange, there is no central
counterparty. Therefore, they are subject to counterparty risk, like an ordinary
contract, since each counter party relies on the other to perform.

6.9 Features of over the counter derivatives:-

1. The management of counter-party (credit) risk is decentralized and located

within
individual institutions.

2. There are no formal centralized limits on individual positions, leverage, or

margining.

3. There are no formal rules for risk and burden-sharing.

4. There are no formal rules or mechanisms for ensuring market stability and
integrity, and for safeguarding the collective interests of market participants.

5. The OTC contracts are generally not regulated by a regulatory authority and the
exchange's self-regulatory organization.

6. When asset prices change rapidly, the size and configuration of counter-party
exposures can become unsustainably large and provoke a rapid unwinding of
positions.

6.10 Exchange traded derivatives:-

They are standardized ones where the exchange

sets the standards for trading by providing the contract specifications and the
clearing corporation provides the trade guarantee and the settlement activities.
Futures and Options are the derivatives. Products like futures and options are
traded in this way.

6.11 Features of Exchange Traded Derivatives:-

1. The management of counter party risk is centralized and located with high
institutions.

2. There are formal centralized limits on individual positions, leverage, or

margining.

3. There are formal rules for risk and burden-sharing.

4. There are formal rules or mechanisms for ensuring market stability and
integrity
and for safeguarding the collective interests of market participants.

5. The exchange traded contracts are generally regulated by a regulatory

authority.

6.12 Types of derivatives:-

1. Forwards:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today's pre-agreed price.

2. Futures:

A futures contract is an agreement between two parties to buy or sell an asset at

a certain time in the future at a certain price. Futures contracts are special types
of forward contracts in the sense that the former are standardized exchange-
traded contracts.

3. Options:

Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyer the right, but not the obligation to
sell a given quantity of the underlying asset at a given price on or before a given
date.

4. Warrants:

Options generally have lives of up to one year; the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.

5. LEAPS:

The acronym LEAPS means Long-Term Equity Anticipation Securities.These are

options having a maturity of up to three years.

6. Baskets:

Basket options are options on portfolios of underlying assets. The underlying

asset is usually a moving average of a basket of assets. Equity index options are a
form of basket options.

7. Swaps:
Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are:

A) Interest rate swaps:

These entail swapping only the interest related cash flow between the parties in
the same currency.

B) Currency swaps:
These entail swapping both principal and interest between the parties, with the
cash flows in one direction being in a different currency than those in the
opposite direction.

8. Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward Swap. Rather
than have calls and puts, the swaptions market has receiver swaptions and payer
swaptions. A receiver swaption is an option to receive fixed and pay floating. A
payer swaption is an option to pay fixed and receive floating.

Chapter 7

REGULATORY FRAMEWORK

Rules and Regulations:

The Government has framed rules under the 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 with by market participants.

7.1 SECURITIES CONTRACTS (REGULATION) ACT 1956:

The Securities Contracts (Regulation) Act, 1956 [SC(R)A] provides for direct and
indirect control of virtually all aspects of securities trading and the running of
stock exchanges and aims to prevent undesirable transactions in securities. It
gives Central Government regulatory jurisdiction over (a) stock exchanges
through a process of recognition and continued supervision,(b) contracts in
securities, and (c) listing of securities on stock exchanges.

7.2 Securities Contracts (Regulation) Rules, 1957:

The Central Government has made Securities Contracts (Regulation) Rules, 1957,
in the exercise of the powers conferred by section 30 of SC(R) Act., 1956 for
carrying out the purposes of that Act. The powers under the SC(R)R, 1957 are
exercisable by SEBI.

7.3 Securities and Exchange Board of India Act, 1992:

Capital Issues (Control) Act, 1947

The Act had its origin during the war in 1943 when the objective was to channel
resources to support the war effort. It was retained with some modifications as a
means of controlling the raising of capital by companies and to ensure that
national resources were channelled into proper lines, i.e., for desirable purposes
to serve goals and priorities of the government, and to protect the interests of
investors. Under the Act, any firm wishing to issue securities had to obtain
approval from the Central Government, which also determined the amount, type
and price of the issue.As a part of the liberalisation process was the repeal of the
Capital Issues (Control) Act, 1947, in May 1992. With this, Government’s control
over issues of capital, pricing of the issues, fixing of premia and rates of interest
on debentures etc. ceased, and the office which administered the Act was
abolished: the market was allowed to allocate resources to competing uses.
However, to ensure effective regulation of the market, SEBI Act, 1992 was
enacted to establish SEBI with statutory powers for:
(a) Protecting the interests of investors in securities,
(b) Promoting the development of the securities market, and
(c) Regulating the securities market.

7.4 SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992:

In terms of regulation 2(g), ‘small investor’ means any investor buying or selling
securities on a cash transaction for a market value not exceeding rupees fifty
thousand in aggregate on any day as shown in a contract note issued by the stock-
broker

7.5 SEBI (Prohibition of Insider Trading) Regulations, 1992:

Insider trading is prohibited and is considered an offence vide SEBI (Insider
Trading)
Regulations, 1992.The definitions of some of the important terms are given
below:

‘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.
‘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.

7.6 SEBI (Prohibition of Fraudulent and Unfair Trade Practices

Relating To Securities Markets) 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. SEBI can conduct investigation, suo moto or upon
information received by it, by an investigating officer in respect of conduct and
affairs of any person dealing, buying/selling/ dealing in securities. Based on the
report of the investigating officer, SEBI can initiate action for suspension or
cancellation of registration of an intermediary.

7.7 The Depositories Act, 1996:

The Depositories Act, 1996 was enacted to provide for regulation of depositories
in securities and for matters connected therewith or incidental thereto. It came
into force from 20th September, 1995.

7.8 The Companies Act, 1956:

There are two types of Companies, viz., Private and Public.Private company
means a company which has a minimum paid-up capital of one lakh rupees or
such higher paid-up as may be prescribed and by its articles:

(a) restricts the right to transfer its shares, if any.

(b) limits the number of its members to fifty.

(c) prohibits any invitation to the public to subscribe for any shares in or
debentures of the company.

(d) prohibits any invitation or acceptance of deposits from persons other than its
members directors or their relatives .

Public company means a company which –

(a) is not a private company.

(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up
capital, as may be prescribed.

(c) is a private company which is a subsidiary of a company which is not a private

company.The minimum number of persons required to form a public company is
seven and the minimum number of persons required to form a private company is
two.

7.9 GOVERNMENT SECURITIES ACT 2006:

With a view to consolidating and amending the law relating to the Government
Securities and its management by the Reserve Bank of India, the Parliament had
enacted the Government Securities Act, 2006. The Act received the presidential
assent on August 30, 2006.

The Government Securities Act also provides that RBI may make regulations to
carry out the purposes of the Act. Government Securities Regulations, 2007 have
been made by the Reserve Bank of India to carry out the purposes of the
Government Securities Act, 2006.
The Government Securities Act, 2006 and Government Securities Regulations,
2007 have come into force with effect from December 1, 2007. The Government
Securities Act applies to Government securities created and issued by the Central
and the State Government.

GOVERNMENT SECURITIES REGULATIONS, 2007:

Government Securities Regulations, 2007 have been made by the Reserve Bank of
India to carry out the purposes of the Government Securities Act.

The Government Securities Regulations, 2007 provides for transfer of

Government securities held in different forms. Government security held in the
form of Government Promissory Notes is transferable by endorsement and
delivery. A bearer bond is transferable by delivery and the person in possession of
the bond shall be deemed to be the holder of the bond. Government securities
held in the form of Stock Certificate , Subsidiary General Ledger account including
a constituent Subsidiary General Ledger Account & Bond Ledger Account are
transferable, before maturity, by execution of forms - III, IV & V respectively
appended to the Government Securities Regulations. Government securities held
in subsidiary general ledger account including a constituents’ subsidiary general
ledger account or bond ledger account, shall also be transferable by execution of
a deed in an electronic form under digital signature.

A person unable to write, execute or endorse a document, may apply to the

Executive Magistrate to execute the document or make endorsement on his
behalf after producing sufficient documentary evidence about his identity and
satisfying the Executive Magistrate that he has understood the implications of
such execution or endorsement.

7.10 Income Tax Act, 1961:

The Income-tax Act, 1961 has been enacted to consolidate and amend the law
relating to income-tax. It deals with matters relating to levy and collection of taxes
on income. There are many provisions in the Income-tax Act which have a direct
or indirect bearing on the financial securities market.

Some key provisions having bearing on the financial markets are lucidly stated in
the following paragraphs. The reader is also expected to refer to the relevant
provisions of Income-tax Act, 1961 for the complete text of the provisions, proper
understanding and interpretation thereof. The finance Act which is passed in the
parliament every year has some or the other amendments to the existing
provisions of the Income Tax Act, 1961.

CHAPTER 8

CONCLUSION

The smooth functioning of the securities market is very crucial for the growth of
the economy at a large. A strong, efficient and vibrant equity as well as debt
market provides a base for an equally strong securities market to keep the wheel
of the economy running. Efficient settlement systems, online trading facility and
demutualization of stock are integral part of a strong secondary market.
 CHAPTER 9

9.1 LIMITATION:
9.2BIBLOGRAPHY:

 www.shodhganga.com
 www.articalesjunction.com
 www.wikipedia.com
 www.nseindia.com
 www.moneycontrol.com
 rishabh publication books
 www.rishabhbooks.in

9.3 QUESTIONNAIRE: