DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

ECONOMICS AND LEGAL ANALYSIS OF STOCK MARKET

SUBJECT

ECONOMICS-II

NAME OF THE FACULTY

Prof. ABHISHEK SINHA

Name of the Candidate R. Jashwanth

Roll No. 2017113
Semester 3

DATE OF SUBMISSION: 28-09-2018

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 ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to our respected Economics
professor, Abhishek Sinha for giving me this golden opportunity to take up this project
regarding “ECONOMICS AND LEGAL ANALYSIS OF STOCK MARKET)”. I have
tried my best to collect information about the project in various possible ways to depict clear
picture about the given project topic.

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 RESEARCH METHODOLOGY

This project is purely Doctrinal and based on primary and secondary sources such as
websites, books, journals and internet sources. The referencing style followed in this project
is BLUE BOOK 19th Edition's format of citation. This Research process deals with
collecting and analysing information to answer questions. The Research is purely descriptive
in its boundaries of the topic

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CONTEXTS:

1. Meaning of Stock Exchange––––––––––––––––––––––––––––––––––––––––––– 5

2. Characteristics or features of stock exchange ––––––––––––––––––––––––––––– 6

3. Role of Stock Exchange in economic growth––––––––––––––––––––––––––––– 7

4. Economic effects of the stock market––––––––––––––––––––––––––––––––––– 9

5. Stock market intermediaries–––––––––––––––––––––––––––––––––––––––––– 11

6. Rules and Regulations––––––––––––––––––––––––––––––––––––––––––––––– 12

7. National Stock Exchange––––––––––––––––––––––––––––––––––––––––––––– 13

8. Bombay Stock Exchange––––––––––––––––––––––––––––––––––––––––––––––14

9. Corporate Governance in stock market–––––––––––––––––––––––––––––––––––17

10 LEGAL CONTROL ON STOCK EXCHANGES OF INDIA––––––––––––––––––––––––

18

11.Conclusion––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 23

12. . Bibiliography––––––––––––––––––––––––––––––––––––––––––––––––––– 24

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Meaning of Stock Exchange:

A stock exchange is a form of exchange which provides services for stock brokers and traders
to buy or sell stocks, bonds, and other securities. Stock exchanges also provide facilities for
issue and redemption of securities and other financia l instruments, and capital events
including the payment of income and dividends. Securities traded on a stock exchange
include stock issued by listed companies, unit trusts, derivatives, pooled investment products
and bonds. Stock exchanges often function as "continuous auction" markets, with buyers and
sellers consummating transactions at a central location, such as the floor of the exchange.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually,
there is a central location at least for record keeping, but trade is increasingly less linked to
such a physical place, as modern markets are electronic networks, which gives them
advantages of increased speed and reduced cost of transactions. Trade on an exchange is by
members only.

The initial public offering of stocks and bonds to investors is by definition done in the
primary market and subsequent trading is done in the secondary market. A stock exchange is
often the most important component of a stock market. Supply and demand in stock markets
are driven by various factors that, as in all free markets, affect the price of stocks

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-
counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock
exchanges are part of a global market for secure In recent years, various other trading
venues, such as electronic commu-nication networks, alternative trading systems and "dark
pools" have taken much of the trading activity away from traditional stock exchanges.

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Characteristics or features of stock exchange are:-

1. Market for securities : Stock exchange is a market, where securities of corporate

bodies, government and semi-government bodies are bought and sold.
2. Deals in second hand securities : It deals with shares, debentures bonds and such
securities already issued by the companies. In short it deals with existing or second
hand securities and hence it is called secondary market.
3. Regulates trade in securities : Stock exchange does not buy or sell any securities on
its own account. It merely provides the necessary infrastructure and facilities for trade
in securities to its members and brokers who trade in securities. It regulates the trade
activities so as to ensure free and fair trade
4. Allows dealings only in listed securities : In fact, stock exchanges maintain an
official list of securities that could be purchased and sold on its floor. Securities which
do not figure in the official list of stock exchange are called unlisted securities. Such
unlisted securities cannot be traded in the stock exchange.
5. Transactions effected only through members : All the transactions in securities at
the stock exchange are effected only through its authorised brokers and members.
Outsiders or direct investors are not allowed to enter in the trading circles of the stock
exchange. Investors have to buy or sell the securities at the stock exchange through
the authorised brokers only.
6. Association of persons : A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
7. Recognition from Central Government : Stock exchange is an organised market. It
requires recognition from the Central Government.
8. Working as per rules : Buying and selling transactions in securities at the stock
*exchange are governed by the rules and regulations of stock exchange as well as
SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
9. Specific location : Stock exchange is a particular market place where authorised
brokers come together daily (i.e. on working days) on the floor of market called
trading circles and conduct trading activities. The prices of different securities traded
are shown on electronic boards. After the working hours market is closed. All the
working of stock exchanges is conducted and controlled through computers and
electronic system.
10. Financial Barometers : Stock exchanges are the financial barometers and
development indicators of national economy of the country. Industrial growth and
stability is reflected in the index of stock exchange.1

1
http://www.yourarticlelibrary.com/stock-exchange/4-main-features-of-stock-exchange/1060

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Role of Stock Exchange in economic growth:

1.Continuous and ready market for securities

Stock exchange provides a ready and continuous market for purchase and sale of securities. It
provides ready outlet for buying and selling of securities. Stock exchange also acts as an
outlet/counter for the sale of listed securities

2. Facilitates evaluation of securities Stock exchange provide easy and quick evaluation of
securities.

3. Encourages capital formation

Stock exchange accelerates the process of capital formation. It creates the habit of saving,
investing and risk taking among the investing class and converts their savings into profitable
investment. It acts as an instrument of capital formation. In addition, it also acts as a channel
for right (safe and profitable) investment.

4. Provides safety and security in dealings

Stock exchange provides safety, security and equity (justice) in dealings as transactions are
conducted as per well defined rules and regulations. The managing body of the exchange
keeps control on the members. Fraudulent practices are also checked effectively. Due to
various rules and regulations, stock exchange functions as the custodian of funds of genuine
investors.

5. Regulates company management

Listed companies have to comply with rules and regulations of concerned stock exchange and
work under the vigilance (i.e supervision) of stock exchange authorities.

6. Facilitates public borrowing

Stock exchange serves as a platform for marketing Government securities. It enables

government to raise public debt easily and quickly.

7. Provides clearing house facility

Stock exchange provides a clearing house facility to members. It settles the transactions
among the members quickly and with ease. The members have to pay or receive only the net
dues (balance amounts) because of the clearing house facility.

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8. Facilitates healthy speculation

Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but
provides more business to the exchange. However, excessive speculation is undesirable as it
is dangerous to investors & the growth of corporate sector.

9. Serves as Economic Barometer

Stock exchange indicates the state of health of companies and the national economy. It acts as
a barometer of the economic situation / conditions.

10. Facilitates Bank Lending

Banks easily know the prices of quoted securities. They offer loans to customers against
corporate securities. This gives convenience to the owners of securities.2

https://www.businesswritingservices.org/.../433-the-role-of-stock-exchange-in-econo..

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Economic effects of the stock market

1. Wealth effect

The first impact is that people with shares will see a fall in their wealth. If the fall is
significant, it will affect their financial outlook. If they are losing money on shares they will
be more hesitant to spend money; this can contribute to a fall in consumer spending.
However, this effect should not be given too much importance. Often people who buy shares
are wealthy and prepared to lose money; their spending patterns are usually independent of
share prices, especially for short-term losses. Also, only around 10% of households own
shares – for the majority of consumers, they will not be directly affected by a fall in share
prices.

2. Effect on pensions

Anybody with a private pension or investment trust will be affected by the stock market, at
least indirectly. Pension funds invest a significant part of their funds in the stock market.
Therefore, if there is a serious and prolonged fall in share prices, it reduces the value of
pension funds. This means that future pension payouts will be lower. If share prices fall too
much, pension funds can struggle to meet their promises. The important thing is the long-
term movements in the share prices. If share prices fall for a long time, then it will definitely
affect pension funds and future payouts. This may cause households to have lower pension
income, and they may feel the need to save more in other terms.

3. Confidence

Often share price movements are reflections of what is happening in the economy. E.g. a fear
of a recession and global slowdown could cause share prices to fall. The stock market itself
can affect consumer confidence. Bad headlines of falling share prices are another factor
which discourages people from spending. For example, the stock market falls of 2008/09
reflected the fall in confidence. On its own, it may not have much effect, but combined with
falling house prices, share prices can be a discouraging factor. However, there are times when
the stock market can appear out of step with the rest of the economy. In the depth of a
recession, share prices may rise as investors look forward to a recovery two years in the
future.

4. Investment

Falling share prices can hamper firms ability to raise finance on the stock market. Firms who
are expanding and wish to borrow often do so by issuing more shares – it provides a low-cost
way of borrowing more money. However, with falling share prices it becomes much more
difficult.

5. Bond market

A fall in the stock market makes other investments more attractive. People may move out of
shares and into government bonds or gold. These investments offer a better return in times of

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uncertainty. Though sometimes the stock market could be falling over concerns in
government bond markets.

How does the stock market affect ordinary people?

Most people who do not own shares will be largely unaffected by short-term movements in
the stock market. However, ordinary workers are not completely unaffected by the stock
market.

1. Pension funds. Many private pension funds will invest in the stock market. A substantial
and prolonged fall in the stock market could lead to a fall in the value of their pension fund,
and it could lead to lower pension payouts when they retire. Similarly, if the stock market
does well, the value of pension funds could increase. Even if people don’t own shares, it is
quite likely people with a private pension will have some connection to the stock market.

2. Business investment. The stock market could be a source of business investment, e.g.
firms offering new shares to finance investment. This could lead to more jobs and growth.
The stock market can be a source of private finance when bank finance is limited. However,
the stock market is not usually the first source of finance. Most investment is usually financed
through bank loans rather than share options. The stock market only plays a limited role in
determining investment and jobs.

3. Short-termism. It could be argued workers and consumers can be adversely affected by

the short-termism that the stock market encourages. Shareholders usually want bigger
dividends. Therefore, firms listed on the stock market can feel under pressure to increase
short-term profits. This can lead to cost cutting which affects workers (e.g. zero contract
hours), or the firm may be more tempted to engage in collusive practices which push up
prices for consumers. It has been argued that UK firms are more prone to short-termism
because the stock market plays a bigger role in financing firms. In Germany, firms are more
likely to be financed by long-term loans from banks. Typically, banks are more interested in
the long-term success of firms and are willing to encourage more investment, rather than
short-term profit maximisation3.

3
www.economicshelp.org

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Stock market intermediaries

Stockbroker:

A stockbroker is a regulated professional individual, usually associated with a brokerage firm

or broker-dealer, who buys and sells stocks and other securities for both retail and
institutional clients, through a stock exchange or over the counter, in return for a fee or
commission. Stockbrokers are known by numerous professional designations, depending on
the license they hold, the type of securities they sell, or the services they provide.

Sub broker :

An intermediary broker, from whom another broker acquires the reinsurance that needs to be
placed.

jobbers:

A jobber is a market dealer, buying and selling in quick succession for a profit of few ticks
( few paise ). These are also called as "scalpers" at few places.

Financiers:

Financiers are badla/carry forward members who provide finance for carry forward deals
only in specified group of shares.

Arbitraguers:

They make deals through differences in prices say buy in Ludhiana and sell in delhi and vice
versa4.

4
https://www.sebi.gov.in/sebi_data/commondocs/pt1b4_h.html

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Rules and Regulations:

Indian Capital Markets are regulated and monitored by the Ministry of Finance, The
Securities and Exchange Board of India and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of Economic Affairs - Capital
Markets Division. The division is responsible for formulating the policies related to the
orderly growth and development of the securities markets (i.e. share, debt and derivatives) as
well as protecting the interest of the investors. In particular, it is responsible for

1. institutional reforms in the securities markets,

2. building regulatory and market institutions,
3. strengthening investor protection mechanism, and
4. providing efficient legislative framework for securities markets.

The Division administers legislations and rules made under the

1. Depositories Act, 1996,

2. Securities Contracts (Regulation) Act, 1956 and
3. Securities and Exchange Board of India Act, 1992.

The RegulatorsSecurities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority established
under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s
primary functions include protecting investor interests, promoting and regulating the Indian
securities markets. All financial intermediaries permitted by their respective regulators to
participate in the Indian securities markets are governed by SEBI regulations, whether
domestic or foreign. Foreign Institutional Investors are required to register with SEBI in order
to participate in the Indian securities markets

 Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934. The
RBI is responsible for implementing monetary and credit policies, issuing currency notes,
being banker to the government, regulator of the banking system, manager of foreign
exchange, and regulator of payment & settlement systems while continuously working
towards the development of Indian financial markets. The RBI regulates financial markets
and systems through different legislations. It regulates the foreign exchange markets through
the Foreign Exchange Management Act, 1999.

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National Stock Exchange

The National Stock Exchange of India Limited has genesis in the report of the High
PoweredStudy Group on Establishment of New Stock Exchanges, which recommended
promotion of a National Stock Exchange by financial institutions (FIs) to provide access to
investors from allacross the country on an equal footing. Based on the recommendations,
NSE was promoted byleading Financial Institutions at the behest of the Government of India
and was incorporated in November 1992 as a tax-paying company unlike other stock
exchanges in the country.On its recognition as a stock exchange under the Securities
Contracts (Regulation) Act, 1956 inApril 1993, NSE commenced operations in the Wholesale
Debt Market (WDM) segment in June1994. The Capital Market (Equities) segment
commenced operations in November 1994 andoperations in Derivatives segment commenced
in June 2000.
CORPORATE STRUCTURE IN NSE
NSE is one of the first de-mutualised stock exchanges in the country, where theownership
and management of the Exchange is completely divorced from the rightto trade on it. Though
the impetus for its establishment came from policy makers inthe country, it has been set up as
a public limited company, owned by the leadinginstitutional investors in the country.From
day one, NSE has adopted the form of a demutualised exchange - theownership, management
and trading is in the hands of three different sets of people. This has completely
eliminatedany conflict of interest and helped NSE in aggressively pursuing policies
andpractices within a public interest framework. The NSE model however, does not preclude,
but in fact accommodates involvement,support and contribution of trading members in a
variety of ways. ItsBoard comprises of senior executives from promoter institutions, eminent
professionals inthe fields of law, economics, accountancy, finance, taxation, etc,
publicrepresentatives, nominees of SEBI and one full time executive of the Exchange.While
the Board deals with broad policy issues, decisions relating to marketoperations are delegated
by the Board to various committeesconstituted by it.Such committees includes
representatives from trading members, professionals, thepublic and the management.The day-
to-day management of the Exchange isdelegated to the Managing Director who is supported
by a team ofprofessional staff.5

5
https://economictimes.indiatimes.com/marketstats/pid-40,exchange-nse,sortby-value,sortorder-desc.cms

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Bombay Stock Exchange:

BSEBombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now
spanning threecenturies in its 133 years of existence. What is now popularly known as BSE
was established as "TheNative Share & Stock Brokers' Association" in 1875.BSE is the first
stock exchange in the country which obtained permanent recognition (in 1956) from
theGovernment of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal
and pre-eminentrole in the development of the Indian capital market is widely recognized. It
migrated from the open outcrysystem to an online screen-based order driven trading system
in 1995. Earlier an Association Of Persons(AOP), BSE is now a corporatised and
demutualised entity incorporated under the provisions of theCompanies Act, 1956, pursuant
to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notifiedby the Securities
and Exchange Board of India (SEBI). With demutualisation, BSE has two of world's
bestexchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.Over the
past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it
withan efficient access to resources. There is perhaps no major corporate in India which has
not sourcedBSE's services in raising resources from the capital market.Today, BSE is the
world's number 1 exchange in terms of the number of listed companies and the world's5th in
transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79
trillion. An investor can choose from more than 4,700 listed companies, which for
easy reference, are classifiedinto A, B, S, T and Z groups.The BSE Index, SENSEX,
is India's first stock market index that enjoys an iconic stature , and is trackedworldwide. It is
an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a'free-
float' methodology, and is sensitive to market sentiments and market realities. Apart from
theSENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has entered into an
index cooperationagreement with Deutsche Börse. This agreement has made SENSEX and
other BSE indices available toinvestors in Europe and America. Moreover, Barclays
Global Investors (BGI), the global leader in ETFsthrough its iShares® brand, has created
the 'iShares® BSE SENSEX India Tracker' which tracks theSENSEX. The ETF enables
investors in Hong Kong to take an exposure to the Indian equity market.The first Exchange
Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings to theinvestors a
trading tool that can be easily used for the purposes of investment, trading, hedging
andarbitrage. SPIcE allows small investors to take a long-term view of the market.BSE
provides an efficient and transparent market for trading in equity, debt instruments and

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derivatives. Ithas a nation-wide reach with a presence in more than 359 cities and towns of
India. BSE has alwaysbeen at par with the international standards. The systems and processes
are designed to safeguardmarket integrity and enhance transparency in operations. BSE is the
first exchange in India and thesecond in the world to obtain an ISO 9001:2000 certification. It
is also the first exchange in the countryand second in the world to receive Information
Security Management System Standard BS 7799-2-2002certification for its BSE On-line
Trading System (BOLT).BSE continues to innovate. In recent times, it has become the first
national level stock exchange tolaunch its website in Gujarati and Hindi to reach out to a
larger number of investors. It has successfullylaunched a reporting platform for corporate
bonds in India christened the ICDM or Indian Corporate DebtMarket and a unique ticker-
cum-screen aptly named 'BSE Broadcast' which enables information
 
dissemination to the common man on the street.In 2006, BSE launched the Directors
Database and ICERS (Indian Corporate Electronic ReportingSystem) to facilitate information
flow and increase transparency in the Indian capital market. While theDirectors Database
provides a single-point access to information on the boards of directors of listedcompanies,
the ICERS facilitates the corporates in sharing with BSE their corporate announcements.BSE
also has a wide range of services to empower investors and facilitate smooth transactions:
 
Investor Services:
The Department of Investor Services redresses grievances of investors. BSEwas the first
exchange in the country to provide an amount of Rs.1 million towards the investor protection
fund; it is an amount higher than that of any exchange in the country. BSE launched
anationwide investor awareness programme- 'Safe Investing in the Stock Market' under
which 264programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT):
BSE On-line Trading (BOLT) facilitates on-line screen basedtrading in securities. BOLT is
currently operating in 25,000 Trader Workstations located acrossover 359 cities in India.
BSEWEBX.com:
In February 2001, BSE introduced the world's first centralized exchange-basedInternet
trading system, BSEWEBX.com. This initiative enables investors anywhere in the world
totrade on the BSE platform.

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Surveillance:
BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the
pricemovements, volume positions and members' positions and real-time measurement of
default risk,market reconstruction and generation of cross market alerts.
BSE Training Institute:
BTI imparts capital market training and certification, in collaboration withreputed
management institutes and universities. It offers over 40 courses on various aspects of
thecapital market and financial sector. More than 20,000 people have attended the BTI
programmes
Awards
•
The World Council of Corporate Governance has awarded the Golden Peacock Global
CSRAward for BSE's initiatives in Corporate Social Responsibility (CSR).
•
The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31
2007have been awarded the ICAI awards for excellence in financial reporting.
•
The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its
effortsin employer branding through talent management at work, health management at work
andexcellence in HR through technologyDrawing from its rich past and its equally robust
performance in the recent times, BSE will continue toremain an icon in the Indian capital6.

6
https://en.wikipedia.org/wiki/Bombay_Stock_Exchange

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Corporate Governance in stock market

Corporations pool capital from a large investor base both in the domestic and in the
international capital markets. In this context, investment is ultimately an act of faith in the
ability of a corporation’s management. When an investor invests money in a corporation, he
expects the board and the management to act as trustees and ensure the safety of the capital
and also earn a rate of return that is higher than the cost of capital. In this regard, investors
expect management to act in their best interests at all times and adopt good corporate
governance practices.  Corporate governance is the acceptance by management of the
inalienable rights of shareholders as the true owners of the corporation and of their own role
as trustees on behalf of the shareholders. It is about commitment to values, about ethical
business conduct and about making a distinction between personal and corporate funds in the
management of a company

Corporate governance is an ethically driven business process that is committed to values

aimed at enhancing an organization’s wealth generating capacity. This is ensured by taking
ethical business decisions and conducting business with a firm commitment to values, while
meeting stakeholders’ expectations.  Corporate governance framework ensures effective
engagement with stakeholders and helps evolve with changing times. Furthermore, an active,
well-informed and independent board is necessary to ensure the highest standards of
corporate governance. Availability of such mechanism will not only improves transparency in
corporate working culture but also instils confidence of investor. 7

7
https://www.oecd.org/finance/financial-markets/43169104.pdf

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LEGAL CONTROL ON STOCK EXCHANGES OF INDIA

1. Control by Central Government:

Under the Act, the Central Government has the right to control the stock exchange in
the following ways:
(1) By requiring stock exchanges to furnish periodical returns about their affairs.

(2) By requiring stock exchanges to provide any explanations and information.

(3) By requiring the submission of the annual report.

(4) By exerting its right, the Central Government may take an enquiry into the working of
any recognized stock exchange.

(5) The Central Government may also order suspension of business and supersede Governing
Boards of Stock Exchanges if business is conducted in violation of rules.

(6) The Central Government may appoint its own nominees on any stock exchange subject to
a maximum limit of three.

(7) It may also compel companies to get them listed and also to comply with listing
arrangements.

2. Regulatory Measures:
Central Government regulates the working of a stock exchange in the following
manner:
(1) It frames bye-laws regarding time of trade and hours of work in stock exchange.

(2) Regulation or abolition of speculative trades like options, badla and blank transfers.

(3) Maintenance of clearing houses.

(4) Frames arbitration rules to be followed during disputes.

(5) Fixation of brokerage fees and license.

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3. Curbs on Speculation:
The Act has made various curbs on speculation. These are:
(1) Making option dealings illegal.

(2) Making option dealings before the Act void.

(3) Discouraging blank transfers.

Directorate of Stock Exchanges:

A Directorate of Stock Exchanges was set up in 1959. It administers and implements the bye-
laws contained in the Securities Regulation Act. It is both in an advisory position as well as in
a position of implementing laws.

It controls the activities of the stock exchange and maintains a close watch over operations
and other illegal dealings. It also gives licenses to dealers on unrecognized stock exchanges.
It maintains a liaison between Government and the Stock Markets in India.

Securities Exchange Board:

In 1987, as a measure of legislative reform as well as to bring in confidence among the
investors, a Securities Exchange Board was set up. Every company issuing capital was to
register itself with the board and abide by its rules and regulations.

The securities exchange board would held in streamlining procedures regarding issue and
transfer of shares. It would bring discipline among existing companies and provide
information to the investors about the working of these companies.

OTC Market:
As an extension to the stock market activity on ‘over the trading counter’ has been formed.
The primary objective of an ‘OTC’ market is to help small or medium companies with viable
projects but high risks.

The capital base of the companies which would be benefited would be between 50 lakhs and
3 crores. The OTC market would extent their services to semi urban and rural areas. They

19
would be decentralized and extend their operations beyond the frontiers of the Stock
Exchange.

Capital Issues Control:

Capital Issues Control Act was passed in 1947 with the objective of:
(a) Giving some direction to new issues so that they are in consonance with the; planned
period,

(b) To ensure protection to investor through legal rules, regulations and controls,

(c) To widen the distribution of shares to public so that there is greater participation of the
investing public,

(d) To incorporate within its control:

(i) All companies which have made a floatation of capital in India, whether incorporated in
India or abroad, and

(ii) All companies registered in India whether floating capital in India or abroad. This Act has
been withdrawn since 1992 and SEBI has taken over the issues.

The SEBI has taken over the functions of the capital issues control. It has brought out
guidelines for the issue of securities.

These are given as follows:

Debit equity ratio:
The debt equity ratio of companies should be 2:1 but it is relaxed in capital intensive projects.

Equity preference ratio:

The equity preference ratio should be 3:1.

Cost of public issue:

The cost of a public issue has been fixed. It cannot exceed the prescribed limit. Equity and
convertible debentures up to 5 crores will consist of mandatory cost + 5%. Issues above 5
crores will be mandatory cost + 2% and non-convertible debenture up to 5 crores is
mandatory cost + 2% above 5 crores = mandatory cost + 1%.

Promoter’s quota:

20
The quota of promoters is fixed between 20 to 25% depending on the paid up capital of the
company.

Employee’s quota:
There is quota for employees and collaborators.

Track record:
The issue price is determined on the company’s 3 year track record. The average of the Book
value and earnings capitalization model is taken.

Documents:
The offer of the issue and prospectus have to be submitted to SEBI with documents,
agreements, technical collaborations, full information about the company’s capital structure,
business activity and the interest of promoters and directors.

Issue of capital:
The capital required by a company should be in accordance with the amount that it issues. It
should maintain a proper balance and avoid evils of over and under capitalization. The
issuing company must file the requirement of capital.

The company has to file the description of projects that it would take up for the next 5 years.
It also has to give details of the interest charges and working capital charges during early
period of formation and construction. The issuing company should indicate foreign exchange
requirements of the company and file its profitability projections of the project also.

The issuing company is also supposed to be issuing capital because it should not rely wholly
on loans and uncertain sources of capital or on projected future profits. A company issuing
capital should be confident that it is raising sufficient capital and does not have to make
another public issue before the completion of the project.

The issue made public should be issue such that the securities are eligible for listing on stock
exchange. The issue should be so attractive that listing is made immediately on the stock
exchange and public confidence is given a boost and are encouraged to purchase shares on
public offer.

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When a company wishes to make an issue at premium after the initial issue, the profit on this
premium should be limited. The price of right issues should be such that the profit becomes
available to the company for using it productively in its projects.

4. Price of Issue:
The issue price should, therefore, be dependent on the economic, social and political factors
of the economy and the state of the capital market. The profit earning capacity of the firm
should also be considered. Company analysis should also be made regarding its dividend
record and reserves position.

In the case of right issues, the existing shareholders should also be allowed to take the offer
of purchase of additional shares beyond the right of purchase in proportion to their holding
offered by the firm.

Those shareholders who renounce their rights on right issues will not be given the facility to
apply for additional issues. When right shares are not fully subscribed they can be distributed
equally to the applicants, small shareholders should be given preference. If balance is still left
unissued the company can sell the shares at the market price.

5. Allotment of Shares:
The allotment of shares had been very irregular by the issuing companies. Some shareholders
who were allotted shares received their allotment and refund letters even after six months.

Now, according to the regulations placed on companies, allotment of shares or refund of non-
allotment of shares should be made within 30 days of receiving applications. If the amount or
information is not received by the applicant within the prescribed period, the issuing
company is liable to pay interest with refunds or allotment letters.

6. Timing of Issue:8
Issues are timed in such a way that both large and small issues are given an equal chance
throughout the year open for public subscription. This also has the advantage of spacing
issues to get a good public response.

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CONCLUSION:

Before liberalization, Indian economy was tightly controlled and protected by number of
measures like licensing system, high tariffs and rates, limited investment in core sectors only.
During 1980’s, growth of economy was highly unsustainable because of its dependence on
borrowings to correct the current account deficit. To reduce the imbalances, the government
of India introduced economic policy in 1991 to implement structural reforms. The financial
sector at that time was much unstructured and its scope was limited only to bonds, equity,
insurance, commodity markets, mutual and pension funds. In order to structure the security
market, a regulatory authority named as SEBI (Security Exchange Board of India) was
introduced and first electronic exchange National Stock Exchange also set up. The purpose
behind this was to regularize investments, mobilization of resources and to give credit.
The economic development of a country depends on establishment of Industries in that
country. Industrial growth of a country ensures the economically development of the country.
Therefore, economic development of a country can be measured through stock exchange. In
other words, it can be said that stock exchange is a barometer of the economic development
of a country. Thus, a stock exchange is a form of exchange which provides services for stock
brokers and traders to trade shares, debentures and other securities. Stock exchanges also
provide facilities for issue and redemption of securities. To be able to trade a security on a
certain stock exchange, that security must be listed there.

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BIBILIOGRAPHY:

BOOKS:
Common Stocks & Uncommon Profits.
Reminiscences of a Stock Operator.

WEBSITES:
http://www.yourarticlelibrary.com/stock-exchange/4-main-features-of-stock-exchange/1060

https://www.businesswritingservices.org/.../433-the-role-of-stock-exchange-in-econo..

www.economicshelp.org

https://www.sebi.gov.in/sebi_data/commondocs/pt1b4_h.html

https://economictimes.indiatimes.com/marketstats/pid-40,exchange-nse,sortby-
value,sortorder-desc.cms

https://www.oecd.org/finance/financial-markets/43169104.pdf

http://www.yourarticlelibrary.com

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