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BY PROF PANDEY
CAPITAL MARKET – BASIC CONCEPTS & VOLATILITY
PRESENTED BY: KOMAL CHANDNANI (7) SUNNY CHHANGANI (8) HIREN JASOLIA (18) NAITIK MODI (25) DARSHIT SHAH (37) VIDHI VARMA (57)
MANAGERIAL ECONOMICS, MMS – I, DIV A
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and as well as equities. The financial markets can be divided into different subtypes: A. Commodity markets, which facilitate the trading of commodities. B. Capital markets which consist of: 1) Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. 2) Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.
Commodity market includes trade contracts for which the underlying asset is commodity. Commodity markets are markets where raw or primary products are exchanged. It can be an agricultural commodity like wheat, soybeans, cotton, etc or precious metals like gold, silver, etc. These commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. A Commodity Exchange is an association, or a company of any other body corporate organizing futures trading in commodities. In a wider sense, it is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition among buyers and among sellers Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Speculators and investors also buy and sell the futures contracts to make a profit. Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It was established in 2003 and is based in Mumbai. MCX is India's No. 1 commodity exchange with 84% Market share in 2008. National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity exchange based in India. It was incorporated as a private limited company incorporated on April 23, 2003
MANAGERIAL ECONOMICS, MMS – I, DIV A
WHAT IS CAPITAL MARKET?
A capital market is a market for securities (both debt and equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is lent for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.
HISTORY OF THE INDIAN STOCK MARKET - THE ORIGIN Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share, which had touched Rs2850/-, could only be sold at Rs.87/-). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange"). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. FOLLOWING IS THE SNAP SHOT OF HISTORY OF INDIAN STOCK MARKET 18th Century 1830's East India Company was the dominant institution and by end of the century, busuness in its loan securities gained full momentum Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader Recognition from banks and merchants to about half a dozen brokers
MANAGERIAL ECONOMICS, MMS – I, DIV A 3
Rapid development of commercial enterprise saw brokerage business attracting more people into the business The number of brokers increased to 60 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India The number of brokers increased to about 200 to 250 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)
PRE-INDEPENDANCE SCENARIO - ESTABLISHMENT OF DIFFERENT STOCK EXCHANGES 1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business. "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay Development of cotton mills industry and set up of many others Establishment of "The Ahmedabad Share and Stock Brokers' Association" Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal "The Calcutta Stock Exchange Association" was formed Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. When recession followed, number of brokers came down to 3 and the Exchange was closed down
1880's 1894 1880 90's 1908 1920
MANAGERIAL ECONOMICS, MMS – I, DIV A
And also government 1940 1944 1947 POST .1934 1936 1937 Establishment of the Lahore Stock Exchange Merger of the Lahore Stock Exchange with the Punjab Stock Exchange Re-organization and set up of the Madras Stock Exchange Limited (Pvt. DIV A 5 . MMS – I. BSE Broker M Market CAPITAL MARKET MANAGERIAL ECONOMICS. etc. Bombay Dyeing. ACC. 1980’s RIL entered the market and slowly and gradually companies developed. Birlas. Trading Cycle In 1980’s there were no computers therefore the trading use to take place In “Ring System”.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established Establishment of "The Hyderabad Stock Exchange Limited" "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited". ONGC.INDEPENDENCE 1970 The only biggest names available in the market were TATA.
MMS – I. DIV A 6 . CAPITAL MARKET MANAGERIAL ECONOMICS. In 1994 SEBI came into power and in the same year NSE National Stock Exchange of India was formed. 1990’s In 1992 SEBI (Security Exchange Board Of India) was formed.1980 STOCK MARKET This process use to take long time as it required physical transfer of shares.
The underlying asset can be equity. which gives them advantages of speed and cost of transactions. repayment of principal amount by the borrower to the lender.000. the company then is 11 said to have 2. 3) WHAT IS A ‘DEBT INSTRUMENT’? Debt instrument represents a contract whereby one party lends money to another on predetermined terms with regards to rate and periodicity of interest.000 is divided into 2. unit trusts. Trade on an exchange is by members only. Usually there is a central location at least for recordkeeping. In the Indian securities markets. Thus. pooled investment products and bonds. For example. DIV A 7 . The holders of such shares are members of the company and have voting rights. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.000 units of Rs 10 each. each called a share. derivatives. To be able to trade a security on a certain stock exchange. MMS – I. 2) WHAT ARE AN ‘EQUITY’/SHARE? Total equity capital of a company is divided into equal units of small denominations. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector. The financial derivatives came into spotlight in post-1970 period due to growing CAPITAL MARKET MANAGERIAL ECONOMICS. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. index.000. 4) WHAT IS A DERIVATIVE? Derivative is a product whose value is derived from the value of one or more basic variables. in a company the total equity capital of Rs 20. but trade is less and less linked to such a physical place.BASIC CONCEPTS 1) STOCK EXCHANGE A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders. to trade stocks and other securities. foreign exchange (forex). A stock exchange is often the most important component of a stock market. as modern markets are electronic networks. it has to be listed there. called underlying.000 equity shares of Rs 10 each. The securities traded on a stock exchange include: shares issued by companies. Each such unit of Rs 10 is called a Share. commodity or any other asset.000.
these products have become very popular and by 1990s. Bonds. bonds. whether upwards or downwards. Mutual Funds invest in 12 various asset classes like equity. which are declared periodically by the mutual fund. debentures. 8) WHAT IS DEMATERIALIZATION? Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). MMS – I. debentures. others are a mix of equity and bonds. The schemes offered by mutual funds vary from fund to fund. government securities. The investment objectives specify the class of securities a Mutual Fund can invest in. 5) WHAT IS A MUTUAL FUND? A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares. and commercial paper and government securities. units etc. debentures etc. 6) WHAT IS AN INDEX? An Index shows how a specified portfolio of share prices is moving in order to give an indication of market trends. However. since their emergence. Investors are also given the option of getting dividends. Government securities. DIV A 8 . The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors.) in electronic form. Some are pure equity schemes. CAPITAL MARKET MANAGERIAL ECONOMICS. they accounted for about two thirds of total transactions in derivative products. or to participate only in the capital appreciation of the scheme. 7) WHAT IS A DEPOSITORY? A depository is like a bank wherein the deposits are securities (viz. It is a basket of securities and the average price movement of the basket of securities indicates the index movement. bonds. shares. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. Mutual funds issue units to the investors.instability in the financial markets.
while the governments (central and state governments) issue debt securities (dated securities. The corporate entities issue mainly debt and equity instruments (shares. While public and rights issues involve a detailed procedure. The price signals. 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.1. issues can be classified as a Public. which subsume all information about the issuer and his business including associated risk. Primary market provides opportunity to issuers of securities. There are two major types of issuers who issue securities. private placements or preferential issues are relatively simpler. They may issue the securities in domestic market and/or international market. The primary markets are where new stock and bonds issues are sold (via underwriting) to investors. the issuance is done to select people. However. DIV A 9 .2. the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. generated in the secondary market. Government as well as corporate. a public issue is an offer to the public to subscribe to the share capital of a company. 1. over the counter. A public issue does not limit any entity in investing while in private placement. They may issue the securities at face value. to raise resources to meet their requirements of investment and/or discharge some obligation. Simply stated. MMS – I. or at a discount/premium and these securities may take a variety of forms such as equity. 1. etc. The way to invite share capital from the public is through a ‘Public Issue’. Issue of Shares Most companies are usually started privately by their promoter(s). The classification of issues is illustrated below: CAPITAL MARKET MANAGERIAL ECONOMICS. In terms of the Companies Act. The primary market issuance is done either through public issues or private placement. So companies invite the public to contribute towards the equity and issue shares to individual investors. Rights or Preferential issues. 1956. Once this is done. debt etc. 1) PRIMARY MARKET: The primary market provides the channel for sale of new securities. The secondary markets are where existing securities are sold and bought from one investor or trader to another. help the primary market in allocation of funds. What are the different kinds of issues? Primarily. the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. debentures. usually on a securities exchange. or elsewhere.).TYPES OF CAPITAL MARKETS: Capital markets consist of the primary market and the secondary market. treasury bills).
which are above or equal to the floor price. It is a mechanism where. The shares offered are called Right Shares and financing the projects of a company by the issue of such right shares is 'right financing'. The issuer company has to comply with the Companies Act and the requirements contained in 18 the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia includes pricing. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act.Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. Rights Issue whenever. bids are collected from investors at various prices. during the period for which the book for the IPO is open. MMS – I.3. through an offer document. 1956 which is neither a rights issue nor a public issue. It may simply be defined as an option to buy a security at a specified price. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. it is required to offer these shares to the existing shareholders at a specified price during a particular period. A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public. CAPITAL MARKET MANAGERIAL ECONOMICS. The process aims at tapping both wholesale and retail investors. INITIAL PUBLIC OFFERING (IPO): TERMINOLOGIES USED: Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. This is a faster way for a company to raise equity capital. This paves way for listing and trading of the issuer’s securities. It is a process used for marketing a public offer of equity shares of a company. an existing company wants to issue new series of equity shares to finance its additional activities. generally at par or at premium but much below the market price. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. DIV A 10 . disclosures in notice etc. 1. It is called a 'right' or Pre-emptive right'.
The Book Running Lead Managers to the issue appoints the Syndicate Members. This means that incase price is not disclosed. Offer document means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue. which is filed Registrar of Companies (ROC) and Stock Exchanges. On the other hand. Floor Price is the minimum offer price below which bids cannot be entered. Red Herring Prospectus (RHP) is a prospectus. Order Book is an 'electronic book' that shows the demand for the shares of the company at various prices. Draft Offer document means the offer document in draft stage. An RHP for and FPO can be filed with the ROC without the price band and the issuer.A Bid is the demand for a security that can be entered by the syndicate/sub-syndicate members in the system. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. The two main components of a bid are the price and the quantity. it is a process of price discovery and the price cannot be determined until the bidding process is completed. Bidder is the person who has placed a bid in the Book Building process. which does not have details of either price or number of shares being offered. if any. MMS – I. An offer document covers all the relevant information to help an investor to make his/her investment decision. Merchant Banker is an entity registered under the Securities and Exchange Board of India (Merchant Bankers) Regulations. The draft offer documents are filed with SEBI. such details are not shown in the Red Herring prospectus filed with ROC in terms of the CAPITAL MARKET MANAGERIAL ECONOMICS. an issuer can state the issue size and the number of shares are determined later. in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. Syndicate Members are the intermediaries registered with the Board and permitted to carry on activity as underwriters. DIV A 11 . The name of the Book Runner Lead Manager is mentioned in the offer document of the Issuer Company. the number of shares and the upper and lower price bands are disclosed. or the amount of issue. SEBI may specifies changes. Hence. in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/ SEs. at least 21 days prior to the filing of the Offer Document with ROC/ SEs. Book Running Lead Manager is a Lead Merchant Banker who has been appointed by the Issuer Company as the Book Runner Lead Manager. In the case of book-built issues. 1999. The Issuer Company in consultation with the Book Running Lead Manager fixes the floor price.
In case promoter is a company. or any parent. DIV A 12 . When they begin to be traded. MMS – I. it means that the cap should not be more than 120% of the floor price. Only on completion of the bidding process. shall continue to hold some minimum percentage in the company after the public issue. if they are acting as such merely in their professional capacity are not be included in the definition of a promoter.e. where the company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). who are controlling the company. an immediate relative of the promoter (i. It may be noted that a director / officer of the issuer company or person. SEBI (DIP) Guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons. Lock-in indicates a freeze on the shares. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. It accompanies the application form of public issues. who are instrumental in the formulation of a plan or program pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). The promoter has been defined as a person or persons who are in over-all control of the company. Price Band: The red herring prospectus may contain either the floor price for the securities or a price band within which the investors can bid. the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. The offer document filed thereafter with ROC is called a prospectus. SEBI does not play any role in price fixation. any spouse of that person. sister or child of the person or of the spouse). by issuing press release and also indicating the change on the relevant website and the CAPITAL MARKET MANAGERIAL ECONOMICS.provisions of the Companies Act. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges. Indian primary market ushered in an era of free pricing in 1992. the details of the final price are included in the offer document. Following this. the market price may be above or below the issue price. Abridged Prospectus contains all the salient features of a prospectus. In other words. There is no price formula stipulated by SEBI. a subsidiary or holding company of that company. There are two types of issues one where company and LM fix a price (called fixed price) and other. any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter Issue Price is the price at which a company's shares are offered initially in the primary market. The spread between the floor and the cap of the price band shall not be more than 20%. 'Promoter Group' includes the promoter. brother.
It is up to the company to decide on the price or the price band. subject to the total bidding period not exceeding thirteen days. the respective figures are 30% for RIIs and 10% for NIIs. which is granted to a company to be exercised through a Stabilizing Agent. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% to QIBs in terms of Rule 19(2) (b) of SCRR. 1. Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively. 2. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. The Issuer specifies the number of securities to be issued and the price band for orders. The basis of issue price is disclosed in the offer document. Any bid made in excess of this will be considered in the High Net worth Individuals (HNI) category. MMS – I. Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines. In case the price band is revised. Allotment: In a book built issue allocation to Retail Individual Investors (RIIs).1. From an investor’s perspective. This is a transitory provision pending harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the guidelines. the bidding period shall be extended for a further period of three days. THE PROCESS: The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. Qualified Institutional Buyers (QIBs) are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. Cut off price: In Book building issue.000.terminals of the syndicate members. The actual discovered issue price can be any price in the price band or any price above the floor price. the issuer is required to indicate either the price band or a floor price in the red herring prospectus. DIV A 13 CAPITAL MARKET . This issue price is called “Cut off price”. 00. an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. in consultation with Merchant Bankers. The issuer is required to disclose in detail about the qualitative and quantitative factors justifying the issue price. It may be understood that the regulatory mechanism does not play a role in setting the price for issues. MANAGERIAL ECONOMICS. ‘Retail individual investor’ (RII) means an investor who applies or bids for securities of or for a value of not more than Rs.
Issue Detail: 1. 2009 Issue Type: 100% Book Built Issue IPO Issue Size: 339.3. 2. 45 Per Equity Share Market Lot: 150 Shares MANAGERIAL ECONOMICS. This process is called 'bidding' and is similar to open auction. 11.800. 5. 10. 10 Per Equity Share Issue Price: Rs. MMS – I. Issue Open: Oct 12. Allocation of securities is made to the successful bidders. to part finance the construction and development of the 1.335 MW Nashik Power Project 3. 5. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Book Building is a good concept and represents a capital market which is in the process of maturing. 2009 . 9. the number of shares is fixed. General corporate purposes. 10 Issue Size: Rs. EXAMPLES: 1) INDIABULLS POWER IPO Objects of the Issue: The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital: 1. IRL. the issue size gets frozen based on the price per share discovered through the book building process. 1.000 Equity Shares of Rs.Oct 15. 12.Rs. To part finance the construction and development of the 1. A Book should remain open for a minimum of 5 days. 6. Funding equity contribution in the Company’s wholly owned subsidiary. Generally. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. 7. 8.320 MW Amravati Power Project Phase – I 2. Bids cannot be entered less than the floor price. DIV A 14 CAPITAL MARKET . 3. 4. 40 . 4. etc. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include Price Aggression Investor quality Earliness of bids. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. 6.529.10 Crore Face Value: Rs. 7.
3.Jul 31. it shall be deemed to have been declined. 10 Per Equity Share Issue Price: Rs. however it may be more than 15 days keeping in mind that shareholders must have sufficient time to make up their mind judiciously. General corporate purposes. 2009 Issue Type: 100% Book Built Issue IPO Issue Size: 301. the offer must be made by giving a notice to the existing shareholders. MMS – I.980 MW at Tiroda. Listing At: BSE. NSE 1.52 Crore Face Value: Rs.4. Maharashtra 3. Minimum Order Quantity: 150 Shares 9. The notice must also indicate that if the offer is not accepted within the specified period.652. DIV A 15 . 10 Issue Size: Rs.8. 100 Per Equity Share Market Lot: 65 Shares Minimum Order Quantity: 65 Shares Listing At: BSE. 2009 .980 MW 2.031 Equity Shares of Rs. 90 . Such period shall not be less than 15 days from the date of offer. Funding equity contribution in our subsidiary Adani Power Maharashtra Limited to part finance the construction and development cost of power project for 1. NSE 2) ADANI POWER LIMITED Objects of the Issue: The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital: 1. To part finance the construction and development of Mundra Phase IV Power Project. for 1.Rs.016. RIGHTS ISSUE: The procedure of right issue as given in the Companies Act may be followed as follows: First. mentioning therein the number of shares offered and the time within which the offer must be accepted. Issue Detail: 1) 2) 3) 4) 5) 6) 7) 8) 9) Issue Open: Jul 28. Again the notice must also state that they have the right to renounce all or any of the shares offered to them in favour of their nominee(s). CAPITAL MARKET MANAGERIAL ECONOMICS.
The Controller of Capital Issues takes decision an application for right issue in concurrence with the company. Any balance left after making allotment of additional shares. If the right shares are not fully taken up. the balance left over shall be distributed equally among the applicants for additional shares with reference to the shares held by them in the company. DIV A 16 . The issue. the company may deal with in any manner it likes. he said. Subject to stock exchange on which the company's shares are listed.The enlargement of equity base may impair Tata Steel’s ability to maintain a high rate of dividend to its shareholders. CAPITAL MARKET MANAGERIAL ECONOMICS.” said the document. Example: Tata comes out with Rs10. Tata group company Tata Steel is coming out with a mega rights issue of about Rs10. Tata’s decision to raise funds from rights issue will result in enlargement of its equity by 20% after the rights issue and 35% after conversion of CCPS into equity. MMS – I. The company’s overall borrowings during 2006-07 increased by over 600% from Rs3.18 crore shares of Rs.Shareholders shall inform the company within stipulated period. An existing shareholder may also apply for the additional shares but a shareholder who has renounced his right in favour of any person is not entitled to apply for additional shares. According to the Draft Letter of Offer filed with the Securities Exchange Board of India (Sebi). will include 12.377 crore to Rs24.15 million pounds of debt for financing the acquisition. opening on 22 November. Tata Steel UK has raised 3. the rights issue will fetch Rs3. 2009. Certain conditions are imposed by him on the company making an offer of right.000 crore to repay the ‘bridge loans’ raised for funding acquisition of British steel behemoth Corus.000 cr rights issue to repay Corus debt.654 crore while CCPS will bring in Rs6.000 crore. The proceeds will be used to repay bridge loans taken for acquisition of Corus. 300 each to be issued on rights basis in the ratio 1:5 and CCPS of Rs100 to be converted into equity on 1 September. The issue will include 12.18 crore shares of Rs300 each to be issued on rights basis in the ratio 1:5 and Cumulative Compulsory Preference Shares (CCPS) of Rs100 to be converted into equity on 1 September.926 crore “principally in connection with its acquisition of Corus and expenditure in connection with other acquisitions and expansions. 2009. of other acceptance of right or the name of the nominee to whom he wants to renounce his right.
In case of options. Two exchanges. The past decade in many ways has been remarkable for securities market in India. All the stock exchanges follow a systematic settlement period. securities are traded for conditional future delivery. 10 year notional zero coupon bond and 6% notional 10 year bond. standardized contracts are traded for future settlement. It has grown exponentially as measured in terms of amount raised from the market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. Mumbai (BSE) provide trading of derivatives of securities. Secondary market comprises of equity markets and the debt markets.2) SECONDARY MARKET: 2. MMS – I. Today the market participants have the flexibility of choosing from a basket of products like: Equities Bonds issued by both Government and Companies Futures on benchmark indices as well as stocks Options on benchmark indices as well as stocks Futures on interest rate products like Notional 91-day T-Bills. Nearly 100% of the trades in capital market segment are settled through demat delivery. They also sell securities for cash to meet their liquidity needs. In derivatives market (F&O market segment of NSE). These options can also be on individual stocks or basket of stocks like index. These futures can be on a basket of securities like an index or an individual security. What is meant by 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. DIV A 17 . namely NSE and the Stock Exchange. OTC markets are informal markets where trades are negotiated. There are two types of options – a put option permits the owner to sell a security to the writer of options at a predetermined price while a call option permits the owner to purchase a security from the writer of the option at a predetermined price. namely. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). NSE also provides a formal trading platform for trading of a wide range of debt securities including government securities in both retail and wholesale mode. Most of the trades in the government securities are in the OTC market.Traded market. CAPITAL MARKET MANAGERIAL ECONOMICS. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. NSE also provides trading in derivatives of equities. number of stock exchanges and other intermediaries. interest rate as well indices. Trades executed on NSE only are cleared and settled by a clearing corporation which provides novation and settlement guarantee. The secondary market is operated through two mediums. the Over-the-Counter (OTC) market and the Exchange. Once the new securities are issued in the primary market they are traded in the stock (secondary) market. the number of listed stocks.1. The exchanges do not provide facility for spot trades in a strict sense. Closest to spot market is the cash market in exchanges where settlement takes place after some time. market capitalization. Majority of the trading is done in the secondary market.
For the management of the company. sophisticated risk management and derivatives trading. liquidity and safety.09% in the year 2007-08. market determined allocation of resources. The turnover ratio. the capital market segment of NSE reported a trading volume of Rs. the secondary market provides an efficient platform for trading of his securities. issuers and intermediaries have changed significantly.217 million. The trading volumes on exchanges have been witnessing phenomenal growth over the past few years. 35. Reforms in the securities market. Secondary market is an equity trading venue in which already existing/preissued securities are traded among investors. Indian market is now comparable to many developed markets in terms of a number of qualitative parameters. Over-the-Counter (OTC) is a part of the dealer market. As of March 2008. CAPITAL MARKET MANAGERIAL ECONOMICS. Secondary market could be either auction or dealer market. During 2007-08. rolling settlement and ban on deferral products. securities are offered to public for subscription for the purpose of raising capital or fund. the increase in FIIs inflows. while the rest of the exchanges had negligible volumes during 2007-08. The turnover ratio is defined as the total value of shares traded on a country’s stock exchange divided by market capitalization. the market capitalization of NSE was Rs.581. While stock exchange is the part of an auction market. Along with this growth. Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities.510. 2. It is used as a measure of trading activity or liquidity in the stock markets. which reflects the volume of trading in relation to the size of the market. etc. and investor population. dematerialization and electronic transfer of securities. 48. 2. the most widely used indicator of the market. The market capitalization ratio is defined as market capitalization of stocks divided by GDP.trading volumes and turnover on stock exchanges.382 million. The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange. stood at 73. screen based nation-wide trading. the profiles of the investors. enabling implementation of incentive-based management contracts. In a short span of time. The movement of the NIFTY50. have greatly improved the regulatory framework and efficiency of trading and settlement. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk.3. has been responding to changes in the government’s economic policies. DIV A 18 . and aggregating information (via price discovery) that guides management decisions. The market has witnessed several institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency. The top 2 stock exchanges accounted for nearly 99% of turnover. particularly the establishment and empowerment of SEBI. It is used as a measure of stock market size. What is the difference between the Primary Market and the Secondary Market? In the primary market. Indian derivatives market has got a place in list of top global exchanges. MMS – I.2. transparency. What is the role of the Secondary Market? For the general investor.
causing prices to fluctuate and the assets to gain or lose value. which covers almost 25 sectors of the economy. These markets account for the majority of stock market activity in India and operate similarly to any other modern stock market. There are 20 other regional Exchanges. CAPITAL MARKET MANAGERIAL ECONOMICS. although the term is often used for all stock exchanges within a country.S. MMS – I. connected via the InterConnected Stock Exchange (ICSE).STOCK MARKETS Stock Markets are a common platform where buyers and sellers come together to transact in stocks and shares. and the National Stock Exchange of India. It is a place where equity. DIV A 19 . or BSE. Demand for stocks and commodities constantly shift. For instance. NATIONAL STOCK EXCHANGE (NSE) The National Stock Exchange of India Limited (NSE). India's major exchanges are the Bombay stock exchange. The NSE’s index is known as S&P CNX Nifty which is a 50 stock index. Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. among many other smaller exchanges. Similarly. for both equities and derivative trading. NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. the U. is a Mumbai-based stock exchange. The National Stock Exchange or NSE was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. A stock market refers to an individual stock exchange. which is NSE. commodities and other investments can be bought and sold. HOW MANY EXCHANGES ARE THERE IN INDIA? The Stock Exchange. It may be a physical entity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment. Though a number of other exchanges exist. where buyers place orders of stock through brokers. weighted by market capitalization. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. has the New York stock exchange and the NASDAQ. The BSE and NSE allow nationwide trading via their VSAT systems.It is the largest stock exchange in India in terms of daily turnover and number of trades. who carry out the transactions.
GAIL (India) Ltd 12. Steel Authority of India Ltd 41.F. H. Reliance Capital Ltd 34. Sterlite Industries (India) Ltd 42. 1. Maruti Suzuki India Ltd 27. Oil & Natural Gas Corporation Ltd 30. HDFC Bank Ltd 15. Cipla Ltd 10. Hero Honda Motors Ltd 16. I T C Ltd 20.NIFTY NIFTY is an index or an indicator of the performance of the companies listed in NATIONAL STOCK EXCHANGE situated in Mumbai.C 19. Punjab National Bank 32.It is located at Dalal Street. Mumbai. Tata Consultancy Services Ltd 46. 1956. Ltd 29. NTPC Ltd 28. Tata Communications Ltd 45. Axis Bank Ltd 5. Reliance Infrastructure Ltd 37. Hindustan Unilever Ltd 18. Reliance Power Ltd 38. DLF Ltd 11. ABB Ltd 2. National Aluminium Co. Hindalco Industries Ltd 17. Ambuja Cements Ltd 4. Reliance Communications Ltd 35. HCL Technologies Ltd 14. Power Grid Corporation of India Ltd 31. Reliance Industries Ltd 36. Idea Cellular Ltd 22. Suzlon Energy Ltd 44. Cairn India Ltd 9. Mahindra & Mahindra Ltd 26. ICICI Bank Ltd 21. ACC Ltd 3. Infosys Technologies Ltd 23. Jindal Steel & Power Ltd 24. Bharti Airtel Ltd 8. currently 4696. MMS – I. Siemens Ltd 39. Tata Motors Ltd 47. State Bank of India 40. Larsen & Toubro Ltd 25. DIV A 20 . Tata Steel Ltd 49. Unitech Ltd 50. Bharat Heavy Electricals Ltd 6. Bharat Petroleum Corporation Ltd 7. Grasim Industries Ltd 13. It is the first stock exchange in India to obtain permanent recognition infrom the Government of India under the Securities Contracts (Regulation) Act. Wipro Ltd BOMBAY STOCK EXCHANGE (BSE) The Bombay Stock Exchange Limited is the oldest stock exchange in Asia and has the greatest number of listed companies in the world. Tata Power Co. CAPITAL MARKET MANAGERIAL ECONOMICS. Sun Pharmaceutical Industries Ltd 43. Ltd 48. Nifty constitutes of 50 companies and the change in the Nifty index (Up or down) indicates the trend in the majority of the stocks. Ranbaxy Laboratories Ltd 33.D.
Tata Consultancy Services 27. Tata Motors 28. BSE BANKEX. At irregular intervals. Reliance Industries 22. SENSEX SENSEX is the short term for the words "Sensitive Index" and is associated with the Bombay (Mumbai) Stock Exchage (BSE).some have been removed while some have been added. Larsen & Toubro CAPITAL MARKET 16. is made of thirty scripts.. The index is followed extensively in Indian capital market and it is regarded as the index of the Indian capital market. Reliance Infrastructure 23. HDFC 7. 10. 9. BSE Auto. including BSE 500. BSE has played a pivotal role in the development of the Indian capital market and its index. Tata Power 29. BSE 100. BHEL 4. DLF Universal Limited 5. Though the SENSEX is the primary and the most widely accept index of BSE there are few indices as well. the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions. Sterlite Industries 25. ONGC 20. Bharti Airtel 3. Reliance Communications 21. BSE provides an efficient and transparent market for trading in equity. DIV A 21 . BSE PSU. Tata Steel 30. BSE Consumer Durables and BSE Metal. Hero Honda Motors Ltd. BSE 200. BSE Pharma. debt instruments and derivatives The BSE SENSEX (SENSitive indEX) is a widely used market index in India and Asia. HDFC Bank 8. BSE Tech. BSE SMLCAP. The 30 scrips of 1986 and no more the same . Jaiprakash Associates 15. Hindustan Lever Limited 11. BSE MIDCAP. is tracked worldwide. The exchange has played a pivotal role in shaping the capital market in India. Today the Sensex constitutes of the following companies: 1. Maruti Udyog 18.The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. NTPC 19. BSE FMCG. State Bank of India 24. Wipro MANAGERIAL ECONOMICS. SENSEX. Mahindra & Mahindra Limited 17. The base was 1979 and taken as 100. The BSE SENSEX also called the "BSE 30”. Infosys 13. Sun Pharmaceutical Industries 26. The SENSEX was first formed on 1-1-1986 and used the market capitalization of the 30 most traded stocks of BSE. ITC Limited 14. Grasim Industries 6. Hindalco Industries Ltd. ICICI Bank 12. MMS – I. ACC 2.
TRADING ON STOCK EXCHANGE The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. from members without CAPITAL MARKET MANAGERIAL ECONOMICS. liquidity and transparency. improving the depth and liquidity of the market. big or small. This imposed limits on trading volumes and efficiency. cost and risk of error. It enables market participants. This was time consuming and inefficient. It provides full anonymity by accepting orders. MMS – I. In order to provide efficiency. to trade with one another simultaneously. irrespective of their geographical locations. It allows faster incorporation of price sensitive information into prevailing prices. DIV A 22 . NSE introduced a nation-wide online fully automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. thus increasing the informational efficiency of markets. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time. as well as on fraud resulting in improved operational efficiency.
The signal is directed to mainframe computer at NSE via VSAT at NSE's office. Similar priced orders are sorted on time priority basis. using fully automated screen-based processes. Technology was used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. impacting the fortunes of other exchanges and forcing them to adopt SBTS also. the high and the low. a message is broadcast to the respective member. This made a huge difference in terms of equal access to investors in a geographically vast country like India. All orders received on the system are sorted with the best priced order getting the first priority for matching i. price-related (buy/sell limit and stop loss orders) or volume related (Disclosed Quantity) conditions can be easily built into an order. The broker enters the order through his PC. the quantity traded during the day in that security. CAPITAL MARKET MANAGERIAL ECONOMICS. NSE has main computer which is connected through Very Small Aperture Terminal (VSAT) installed at its office. Brokers can trade from their offices.revealing their identity. MMS – I. which runs under Windows NT and sends signal to the Satellite via VSAT/leased line/modem. The trading system also provides complete market information on-line. DIV A 23 . A message relating to the order activity is broadcast to the respective member. The trading system operates on a strict price time priority. An investor informs a broker to place an order on his behalf. Where an order does not find a match. it remains in the system and is displayed to the whole market. On order matching. Today India can boast that almost 100% trading take place through electronic order matching. The main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange. This order matches with the existing passive order(s). Their workstations are connected to a Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs). the one that came in early gets priority over the later one. etc. The market screens at any point of time provide complete information on total order depth in a security. The order confirmation message is immediately displayed on the PC of the broker. This sucked liquidity from other exchanges and in the very first year of its operation. which helps to resolve disputes by logging in the trade execution process in entirety. the five best buys and sells available in the market.e.e. It also provides a perfect audit trail.related (immediate or cancel). NSE carried the trading platform further to the PCs at the residence of investors through the Internet and to handheld devices through WAP for convenience of mobile investors. Electronic trading eliminates the need for physical trading floors. Orders are matched automatically by the computer keeping the system transparent. the best buy orders match with the best sell order.. Brokers have terminals (PCs) installed at their premises which are connected through VSATs/leased lines/modems. Several time . i. objective and fair. The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. otherwise it waits for the active orders to enter the system. Investors can also know the fate of the orders almost as soon as they are placed with the trading members. The orders placed by brokers reach the Exchange's central computer and are matched electronically. NSE became the leading stock exchange in the country. the last traded price. thus providing equal access to everybody. till a fresh order comes in or the earlier order is cancelled or modified.
HOW TO BUY SHARES? To buy shares one needs to contact a broker. Savings Bank Account CAPITAL MARKET MANAGERIAL ECONOMICS. The order is automatically affected if the prices match. One can trade by executing a deal only through a registered broker of a recognized Stock Exchange or through a SEBI. If the price quantity conditions do not match. One has to then place the order with the broker. The term ‘limit order book’ refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. The order department confirms the order with the broker. who also works on the exchange floor. The broker confirms the trade with investor. the limit order will not be executed. Thus the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB). The broker sends the order to the firm's order department. The investor needs to contact the broker over the phone or personally to place an order for a certain number of shares of a particular organization if investor or trader is not doing online trading. The order department sends the order to the firm's clerk who works on the floor of the exchange where shares of Reliance are traded (stock exchange). One can't deal directly with the stock exchange. The clerk gives the order to the firm's floor trader. it is termed as an ‘Open Book’.For example: Investors place the order with investor’s broker to buy 100 shares of the Reliance Company. WHY DOES ONE NEED A BROKER? Share broker is a person or group of persons that buys and sells shares and other securities through market makers on the behalf of investors. Limit orders are orders to buy or sell shares at a stated quantity and stated price. MMS – I. The floor trader reports the trade to the clerk and the order department. Investors employ a full-time broker. The order is executed. One has to enter into a broker-client agreement and fill in the client registration form.the stock exchange takes care of those details. preferably in writing & get a trade confirmation slip on the day the trade is executed and ask for the contract note at the end of the trade date The broker will place an order on your behalf and the shares will be moved once the order is complete One never comes to know from whom to buy or sell to . DIV A 24 . What one does is place an "order" to buy or sell shares. only registered members can operate in the stock market. so one has to use the services of a broker who is registered with the exchange. As per SEBI regulations.registered sub-broker (people licensed by brokers to work under them) One needs to open 3 Accounts to buy / sell Equity shares from the Indian Stock Market. The floor trader goes to the specialist's post for Reliance and finds another floor trader who is willing to sell shares of Reliance. and the exchange looks for people on the opposite side willing to deal at that price. The traders agree on a price. Since the order book is visible to all market participants.
but also through a bank statement. These accounts let customers set aside a portion of their liquid assets that could be used to make purchases while earning a monetary return. they are like bank branches). traditionally through a bank passbook. All these will show in your demat account. has allowed trades of upto 500 shares to be settled in physical form. Why demat? CAPITAL MARKET MANAGERIAL ECONOMICS. Although the market regulator. sell and transact shares without the endless paperwork and delays. to open your demat account. What is demat account? Demat refers to a dematerialised account. Is a demat account a must? Nowadays. they are adjusted in your account. you need to open a demat account if you want to buy or sell stocks. DEMAT ACCOUNT: Demat account allows you to buy. So a demat account is a must for trading and investing. SAVINGS BANK ACCOUNT: A Savings Bank account is required for carrying out various financial transactions associated with trading of shares. Savings Bank accounts are accounts maintained by banks that pay interest but cannot be used directly as money (by. nobody wants physical shares any more. the DP will provide you with periodic statements of holdings and transactions. the Securities and Exchange Board of India (SEBI). So it is just like a bank account where actual money is replaced by shares. This is where the money on sale of shares is credited or money for buying shares will be debited from. 200 of IBM and 120 of TCS shares. for example. As you buy and sell the shares. DIV A 25 . MMS – I. make cheque payments etc. You have to approach the DPs (remember. All savings accounts offer itemized lists of all financial transactions. Just as you have to open an account with a bank if you want to save your money. practically all trades have to be settled in dematerialised form. Let’s say your portfolio has 100 of Satyam. Just like a bank passbook or statement. So you don’t have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. writing a cheque). Demat Account Share Trading Account. secure and convenient. It is also safe.
SBI etc. After dematerialization. How to get a Demat account? To get a demat account. your depository account would be credited with the dematerialized securities It is to be noted that a broker is not similar to a DP. Reduction in paperwork involved in transfer of securities. enables quick ownership of securities on settlement resulting in increased liquidity. and obtain quick receipt of such benefits as stock splits and bonuses. In India.The demat account reduces brokerage charges. it eliminates risks associated with forgery. Elimination of risks associated with physical certificates such as bad delivery. gives you an account where you can hold those shares. The form can be obtained from the DP with whom your demat account is opened. No stamp duty on transfer of securities. A depository is a place where an investor's stocks are held in electronic form. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. are Depository Participants. For dematerialization of physical share certificate(s) you have to first fill the demat request form (DRF). even one share can be sold. on the other hand. makes pledging/hypothecation of shares easier. and provides easy receipt of public issue allotments. delays. Submit the DRF & share certificate(s) to DP. MMS – I.5 per cent payable on physical shares). postal delays and loss of certificates in transit. avoid filling up of transfer deeds. Deface the share certificate(s) by writing across Surrendered for dematerialization. No odd lot problem. ICICI. thefts etc.. one needs to to approach a Depository Participant. Further. CAPITAL MARKET MANAGERIAL ECONOMICS. The depository has agents who are called Depository Participants. there are over a hundred DPs. Reduction in transaction cost. fake securities.the National Securities Depository Ltd (NSDL) and the Central Depository Services Ltd (CSDL). counterfeiting and loss due to fire. Immediate transfer of securities. DIV A 26 . avoids confusion in the ownership title of securities. A DP. theft or mutilation. Demat account holders can also avoid stamp duty (as against 0. There are only two depositories in India -. Banks like HDFC. DP would forward them to the issuer. The Benefits A safe and convenient way to hold securities. It also helps you avoid bad deliveries caused by signature mismatch.
Photo credit card. Transmission of securities is done by DP eliminating correspondence with companies. Ration card. a savings. This can also be asked for from the DP. arising out of Holding investments in equity and debt instruments in a single account. The DPs also ask for a DP-client agreement to be executed on non-judicial stamp paper. MMS – I. Here is a broad list: A cancelled check. your photographs (with coapplicants) and proof of identity/residence/date of birth have to be submitted. If you plan to open a demat account with a bank. they will need the originals for verification Statement of Account: A periodical statement of holdings and transactions is provided by DP. Nomination facility. Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately. DIV A 27 . account of shares. banks usually offer additional incentives to customers who open a demat account with them. Employee ID card. or address self-attested facsimile copies of PAN card. such holder has an edge over the non-account holder. While they only ask for photocopies of the documents. or other account for which the holder have been issued a check book. or latest Electricity/Landline phone bill are sufficient. Along with the application form. Bank attestation. one and/or more For proof of identification and. Required Documents The extent of documentation required to open a demat account may vary according to your relationship with the institution. Driver’s license. CAPITAL MARKET MANAGERIAL ECONOMICS. In fact. Passport. Automatic credit into demat bonus/split/consolidation/merger etc. Voter’s ID. current and. latest IT returns and. preferably MICR Proof of Identification Proof of Address Proof of PAN card (mandatory) Recent photographs.
DIV A 28 . Also. government levies like the Securities Transaction Tax (STT) will be incurred on such transactions.the largest stock exchange in India.DEPOSITORY SYSTEM In the depository system. minimise risk and reduce costs. offers depository services to investors. Unit Trust of India (UTI) . stockbrokers. after filling up the required forms and providing identity and address proofs. MMS – I. This charge varies across different trading houses. are eligible to act as DPs. The actual trading can be done by phone. HDFC Bank. NSDL aims at ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency. financial institutions. Bank of India. 2) CDSL CDSL was set up with the objective of providing convenient. banks. etc.. This method does away with all the risks and hassles normally associated with paperwork. custodians. Consequently. CAPITAL MARKET MANAGERIAL ECONOMICS.. Union Bank of India and Centurion Bank. who as an agent of the depository. Standard Chartered Bank. There is a brokerage charge that is incurred for both buying and selling of shares. A Trading account can also be opened with most banks and financial institutions. the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP). TRADING ACCOUNT The Securities and Exchange Board of India (SEBI) mandates a demat account for equity share trading even One equity share.the largest mutual fund in India and National Stock Exchange of India Limited (NSE) . securities are held in depository accounts. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialization of his holdings and transferring securities 1) NSDL NSDL is promoted by Industrial Development Bank of India Limited (IDBI) .CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of India. Bank of Baroda. internet or using transaction slips that are provided at the time of opening the account. According to SEBI guidelines. Transfer of ownership of securities is done through simple account transfers. dependable and secure depository services at affordable cost to all market participants . which is more or less similar to holding funds in bank accounts.the largest development bank of India.
Delivery and clearing of security takes place through a clearance house. The clearinghouse makes the payment and delivers the security certificates to the members on the payout day. date of transaction. DELIVERY AND CLEARING Delivery of shares takes place through the instrument known as transfer deed. When the client does not fix any price limit or time limit on the execution of the order and relies on the judgement of the broker is called 'Open Order'. DIV A 29 . 4. telephone. It is the basis of the transaction. TRADE EXECUTION The broker has to execute the order placed by his client during the trading hours. stamp of the selling broker. PLACING ORDER An order is to be placed by an investor with the broker either to buy or sale of certain number of securities at a certain specified price. names of the parties. 3. SETTLEMENT The procedure adopted for the settlement of transactions varies depending upon the kind of securities. are entered in the contract note. CAPITAL MARKET MANAGERIAL ECONOMICS. Each broker settles the account with every client by taking delivery or giving delivery of securities certificates and receipts or payment of cheques.TRADING PROCEDURE The following are the steps involved in the trading of securities at a stock exchange: 1. Particulars such as price. MMS – I. The order is executed as per requirements of the client. On the date of settlement cheques/ drafts and securities are exchanged as per the delivery order. It contains the details of the transferee. The transfer deed is signed by the transferor (seller) and is authenticated by a witness. An order can be placed by telegram. There are different types of orders. and letter or in person. quantity of securities. telex/ fax. brokerage etc. 5. The broker may negotiate with other parties in order to execute the orders. Delivery and payment may be completed after 14 days as specified at the time of negotiation. When in the order the client places a limit on the price of the security it is called limit order. CONTRACT NOTE When the order is executed. the broker prepares a contract note. 2. etc. Where the order is to be executed by the broker at the best price. such an order is called 'Best Rate Order'.
While it is not necessary to have the Dmat account. it would have been necessary to move the amount from the Trading account into the Bank account. no. especially for individuals trading using the internet. If the Bank account had been with a different organization. of shares to buy and the price at which to buy. Depending on this information. When the desired price is reached. this trade is executed and the shares are debited from the Dmat account and the amount (after adjusting for charges) is credited to the Bank account. then for carrying out this trade. no. of shares to sell and the price at which to sell. VARIOUS SECTORS The companies listed in BSE and NSE are divided into various sectors depending upon company’s profile The various sectors are as follows: CAPITAL MARKET MANAGERIAL ECONOMICS. this trade is executed and the amount (after adjusting for charges) is debited from the Bank account and the shares are credited into the Dmat account. The following example of buying and selling using a Trading account on the internet illustrates the convenience of having the Dmat account. the required no of shares from the Demat account is set aside for this trade. Trading account and Bank account with the same organization. having it with the same organization offers additional convenience. an individual is ready to start trading. then after this trade. it would have been necessary to move the amount into the Trading account. Trading account and Bank account are in place. MMS – I.ONLINE TRADING PROCESS Once the Demat account. Depending on this information. When the desired price is reached. he/she logs into the Trading account and specifies the details like the Company name. the required amount from the Bank account is set aside for this trade. DIV A 30 . Selling shares: When an individual wants to sell a share. If the Bank account had been with a different organization. Trading account and Bank account with the same organization. Buying shares: When an individual wants to buy a share. he/she logs into the Trading account and specifies the details like the Company name.
DIV A 31 .Aluminum Automobiles Auto Ancillaries Banking Cement Construction Telecom Textiles Capital Goods Domestic Pharma Engineering Fin. The definition of mid-cap shares can vary from market to market and from country to country. but generally it involves a company with a market capitalization of between $300 million and $2 billion. IVRCL Infrastructures and Nagarjuna Construction have recorded impressive performances with a sharp growth in their sales and earnings. Nano-cap stocks are even smaller. The objective of such an index is to capture the movement in the mid-cap shares segment. mid-cap shares are those stocks that have a market capitalization ranging from Rs 9. Bajaj Hindustan. the National Stock Exchange (NSE) defines the mid-cap universe as stocks whose average six months’ market capitalization is between Rs 75 crore and Rs 750 crore. The name ‘mid-cap’ originates from the term medium capitalized.000 crore. Small-cap stocks are stocks with a relatively small market capitalization. Below this. e. SMALL CAP: Small cap are generally small companies that have just incorporated.000 crore to Rs 45. Institutions FMCG Hotels MNC Pharma Paint Realty IT Power Refinery Retailing Shipping Software Steel Sugar Consumer Durables Healthcare MID CAP: The National Stock Exchange manages an index called CNX Midcap 200. According to the NSE. the definition of 'small cap' can vary among brokerages. and involve small public companies having a market capitalization of below $50 million. There is no classical definition of mid-cap shares. These companies do well early in an economic recovery. It is based on the market capitalization of the stock.g. when interest rates are low and they have easy access to funds to invest into their growth. In case of India. This index provides investors a broad-based benchmark for comparing portfolio returns in the mid-cap segment. CNX Midcap 200 represents about 77% of the total market capitalization of the mid-cap universe and 75% of the total traded value. these shares would be classified as large-cap shares. Market capitalization is calculated by multiplying the current stock price with the number of shares outstanding or issued by the company.: Midcap companies like Jain Irrigation Systems. Classifications such as 'large cap' or 'small cap' are only approximations that change over time. Even these aren't the smallest breeds. However. In India. In the US. MMS – I. CAPITAL MARKET MANAGERIAL ECONOMICS. they are the riskiest stocks because smaller companies are more likely to fail. They have a market capitalization of less than $1 or $2 billion. In fact. companies having a market capitalization between $50 million and $300 million are called 'micro cap' stocks.
You may start with these also. If you hold 100 shares of Rs. These are large. Although the total number of issued shares increases. 4 per share. There are two ways of giving bonus to shareholders: 1) By making partly paid shares as fully paid 2) By issuing fully paid bonus shares. MMS – I. The assets of a company also consist of cash reserves. Thus.Generally. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you. A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). An issue of bonus shares is referred to as a bonus issue. so they are a safer investment than small cap companies. you get 200 shares free. relatively stable companies whose stock prices may not grow as fast as a smaller company. Without any cost to you. it does not increase the value of the company. you are not required to pay the balance of Rs. DIV A 32 . 10 each of a company. for the bonus only equity shareholders are entitled & the preference shareholders only if they are participating. OTHER IMPORTANT CONCEPTS BONUS SHARES Bonus share is a free share of stock given to current shareholders in a company. these free reserves increase. their large size makes them less likely to go out of business. Depending upon the constitutional documents of the company. After a while. based upon the number of shares that the shareholder already owns. LARGE CAP: Large cap refers to companies that have a market capitalization of over $5 billion or even $10 billion. If you hold 100 fully paid shares of a company and a 2:1 bonus offer is declared. Bonus shares are issued by cashing in on the free reserves of the company. It is CAPITAL MARKET MANAGERIAL ECONOMICS. the ratio of number of shares held by each shareholder remains constant. However. This date is termed as "Book Closure" date or "Record Date". there has to be a cut-off date for such benefits to be transferred to the shareholders. That is because it is difficult to grow quickly when you are already the market leader. only certain classes of shares may be entitled to bonus issues. and the company wanting to issue bonus shares converts part of the reserves into capital. or may be entitled to bonus issues in preference to other classes. which most of these companies are. But they escape the state regulatory oversight and there is no point in sticking to them. partly paid at Rs. the partly paid shares are converted into fully paid shares by the company. When a company declares bonus issues. A bonus issue is a signal that the company is in a position to service its larger equity. issues bonus by making the shares fully paid. 6 per share & the co. While the issue of bonus shares increases the total number of shares issued and owned.
In Oct. Only shareholders marked in the company's register at the Book Closure Date or the Record Date would be entitled to receive these benefits. Buying back stock allows the company to earn a better return on excess cash and keep itself from becoming a takeover target. higher earnings per share should command a higher stock price. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback. which in turn enhances the Earning Per Share (EPS) ratio. Buying back stock uses up excess cash. The repurchase of shares reduces the number of shareholders. X by the company. 3. Buying back stock means that the company earnings are now split among fewer shares. WHY COMPANIES BUYBACK? Unused Cash: If they have huge cash reserves with not many new profitable projects to invest in and if the company thinks the market price of its share is undervalued. After the record date. X on 2 January. of equity shares. If a company announces book closure as 1 January. meaning higher earnings per share (EPS). Y buys this stock from Mr. Cash rich companies are also very attractive takeover targets. which should shoot up the price. If Mr. The rationale behind buyback is to boost demand by reducing supply of shares. MMS – I. CAPITAL MARKET MANAGERIAL ECONOMICS. dividend divided by the total no. A company generally announces such a date along with the announcement of the bonus issue. the shares are referred to as cum-bonus.g. The stock price of said company may go up 2. the benefit of bonus issue will still be transferred to Mr. shareholders who as on that day own the stock will be entitled to the bonus issue. Theoretically. EPS is Net Profit after payment of tax & pref.the date after which the company will not handle any transfer of shares requests until the benefits are transferred. Eg. Mukesh Ambani led RIL declared a bonus share for every share owned in the company BUYBACK OF SHARES A Share buyback occurs when a company repurchases some of its own stock either through purchasing shares on the open market or by buying shares directly from shareholders through a tender offer at a premium to current market price. the shares become exbonus.The share buyback may increase the share price of a company by reducing the supply of shares available for purchase. e. After the announcement of the bonus but before the record date. when the bonus has been given effect. DIV A 33 . 09. Investor's percentage share of the company's earnings is now perceived to be greater by other investors. The investor can benefit from this in two ways: 1.
the company using a buyback strategy makes it more difficult for an investor to gain a controlling stake in the company. Show better financial ratios Companies try to use buyback method to show better financial ratios.100 Cr stock buy-back program. CAPITAL MARKET MANAGERIAL ECONOMICS. A corporation whose stock is performing well may choose to split its shares. This requires approval from the board of directors and shareholders. and return on equity (ROE) increases as there is less outstanding equity. Escape monitoring of accounts and legal controls If a company wants to avoid the regulations of the market regulator by delisting. since buyers and sellers of the stock all know about the stock split (in this example. an improvement could jump-start the stock Increase promoter's stake A company may also buy its shares back to increase the stake of promoters and to help fend off hostile takeover bids. For e. distributing additional shares to existing shareholders. DIV A 34 . the country’s biggest real estate developer. In Oct 09. The price per share immediately adjusts to reflect the stock split.g. when a company uses its cash to buy stock. MMS – I. This is mainly attributed to the buyback offer made at higher prices. Recently the prices of RIL and REL have not fallen. The most common stock split is twofor-one. the Anil Ambani promoted Reliance Infrastructure (R-Infra) announced buy back of shares worth Rs 700 crore. Since investors carefully scrutinize only EPS and P/E figures. return on assets (ROA) actually increases with reduction in assets. began Rs 1. DLF Ltd. despite the spat between the promoters. By reducing the number of shares available and driving up the share price. in which each share becomes two shares. the share price would be cut in half). In Feb 09. STOCK SPLIT An increase in the number of outstanding shares of a company's stock. such that proportionate equity of each shareholder remains the same. If the company earnings are identical before and after the buyback earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve.Market perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. as expected. Some companies decide to split their stock if the price of the stock rises significantly and is perceived to be too expensive for small investors to afford also called split. Thus. it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). Exit option If a company wants to exit a particular country or wants to close the company. They avoid any public scrutiny of its books of accounts.
For the joint stock company. For example. that money can be put to two uses: it can either be re-invested in the business (called retained earnings). This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted (many stock exchanges will delist stocks if they fall below a certain price per share).50 per share. Another reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing and people assume this growth will continue in the future. Another version of a stock split is the reverse split. A stock's price is also affected by a stock split. they end up boosting demand and drive up prices. the market capitalization remains constant. 10 million outstanding shares at 50 cents each would now become two million shares outstanding at $2. After a split. although the number of outstanding shares and the stock price change. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. the stock price will be reduced since the number of shares outstanding has increased. in a reverse 5-for-1 split. MMS – I. and again. DIV A 35 . For a joint stock company. In both cases. CAPITAL MARKET MANAGERIAL ECONOMICS. stock splits help make shares more affordable to small investors and provide greater marketability and liquidity in the market. When a corporation earns a profit or surplus. the company is worth $50 million. In the example of a 2-for-1 split. A stock split can also result in a stock price increase following the decrease immediately after the split. in a 2-for-1 stock split. For example. every shareholder with one stock is given an additional share.All publicly-traded companies have a set number of shares that are outstanding on the stock market. it will have 20 million shares outstanding after a 2-for-1 split. the share price will be halved. a shareholder receives a dividend in proportion to their shareholding. Therefore. the market capitalization (and the value of the company) does not change. A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. DIVIDENDS Dividends are payments made by a corporation to its shareholder members. if a company had 10 million shares outstanding before the split. or it can be paid to the shareholders as a dividend. lift demand and prices. Thus. It is the portion of corporate profits paid out to stockholders. Since many small investors think the stock is now more affordable and buy the stock. As a result. The bottom line is a stock split is used primarily by companies that have seen their share prices increase substantially and although the number of outstanding shares increases and price per share decreases. Many corporations retain a portion of their earnings and pay the remainder as a dividend. So. a dividend is allocated as a fixed amount per share.
If the Exchange conducts a Buy-In auction. Competitor: The party who enters on the same side as of the initiator is called a competitor. If you are a buyer in XYZ Company for say 3000 shares @ Rs. Competitor orders are the orders which compete with the initiator’s order i. if the initiator order is a buy order. allocate dividends according to members' activity. The Exchange purchases the requisite quantity in auction market and gives them to the buying trading member. as a payment from the company to the shareholder. on the other hand. In the Auction market. E. many public companies offer dividend reinvestment plans. After the competitor period ends. Solicitor orders are the orders which are opposite to the initiator order i. if the initiator’s order is a buy order. AUCTION On account of non-delivery of securities by the trading member on the pay-in day.g. MMS – I. then all the buy orders for that auction other than the initiator’s order are competitor orders. There are three types of participants in the auction market. rather. Initiator: The party who initiates the auction process is called an initiator. When the auction starts. Auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. then all the buy orders for that auction are solicitor orders.paying dividends is not an expense. This ensures that the buying trading member receives the securities.e. sometimes called a special dividend to distinguish it from a regular one. the trading members entering sell orders are called solicitors. the shares are then auctioned by the exchange. which automatically use the cash dividend to purchase additional shares for the shareholder. such as store credits (common among retail consumers' cooperatives) and shares in the company (either newly-created shares or existing shares bought in the market. the solicitor period for that auction starts. CAPITAL MARKET MANAGERIAL ECONOMICS. The delivery of the same shares would be available to you in your Demat Account at T+2days. the competitor period for that auction also starts. Solicitor: The party who enters on the opposite side as of the initiator is called a solicitor. Solicitor period is the period during which solicitor order entries are allowed. DIV A 36 . the securities are put up for auction by the Exchange. Cooperatives. Competitor period is the period during which competitor order entries are allowed.e. auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. If there is an availability shortage. then all the sell orders for that auction are solicitor orders and if the initiator order is a sell order.g. Dividends are usually settled on a cash basis. The main reasons are Shortages. it is the division of an asset among shareholders. but may declare a dividend at any time. And if the initiator order is a sell order then all the sell orders for that auction other than the initiators order are competitor orders. For e. Public companies usually pay dividends on a fixed schedule. They can take other forms. 140 each. so their dividends are often considered to be a pre-tax expense. The trading members can participate in the Exchange initiated auctions by entering orders as a solicitor. Bad Deliveries and Objections.) Further.
1992 provides for establishment of Securities and Exchange Board of India (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. the system calculates the trading price for the auction based on the initiator order and the orders entered during the competitor and the solicitor period. the matching takes place at the respective solicitor order prices Competitor period and solicitor period for any auction are set by the Exchange. mutual funds and other persons associated with the securities market. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. sub–brokers etc. MMS – I. 1992. During this process. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from.After the solicitor period. In particular. it has powers for: Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers. CAPITAL MARKET MANAGERIAL ECONOMICS. Who regulates the Securities Market? The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA). SEBI Act. order matching takes place. in addition to all intermedia ries and persons associated with securities market. Department of Company Affairs (DCA). REGULATORS Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. conducting inquiries and audits of the stock exchanges. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. intermediaries. undertaking inspection. What is SEBI and what is its role? The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act. At present for Exchange initiated auctions. Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). After this the auction is said to be complete. self – regulatory organizations. DIV A 37 .. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities.
Now. The number of instruments available in derivatives has been expanded in phases. ‘Puts’ give the buyer the right. at NSE futures and options are traded on the Nifty. Bank Nifty Index. Nifty Midcap 50 as well as options and futures on single stocks (228 stocks as on May 2008). there are futures and options based on benchmark index NIFTY50. CNX Nifty Junior. NSE accounts for nearly 98% of the derivatives turnover in India.DERIVATIVES Trading in derivatives commenced in the Indian market in June 2000. This was followed by approval for trading in options based on these indices and options on individual securities and also futures on interest rates derivative instruments (91-day Notional Tbills and 10-year Notional 6% coupon bearing as well as zero coupon bonds). While a buyer of an option pays the premium and buys the right to exercise his option.Calls and Puts options: ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset. the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. 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. Presently. Options: An Option is a contract which gives the right. MMS – I. whereas stock options follow an American style of settlement. To begin with. DIV A 38 . CNX 100. 130. to buy or sell the underlying at a stated date and at a stated price.779 million.904. CNX IT Index. The Mini NIFTY50 Futures & Options contract was introduced for trading on January 1. at a given price on or before a given future dates. Options are of two types . 2008. but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. BANK Nifty and 116 single stocks. the derivatives market segment of NSE witnessed a trading value of Rs. During 2007-08. CAPITAL MARKET MANAGERIAL ECONOMICS. SEBI only approved trading in index futures contracts based on NIFTY50 Index and BSE-30 (Sensex) Index. CNX IT. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Index options on NSE follow European style of settlement. but not an obligation. such as futures of the Nifty index.
CAPITAL MARKET MANAGERIAL ECONOMICS. MMS – I. DIV A 39 .
At the end of each quarter.m.m.m. For auction market the price bands of 20% are applicable. 15% and 20%. Price bands of 20% (either way) on all remaining scrips (including debentures. these absolute points of index variations are revised for the applicability for the next quarter. In order to prevent members from entering orders at non-genuine prices in such securities. the Exchange has fixed operating range of 20% for such securities. either way viz.CIRCUIT BREAKERS The Exchange has implemented index-based market-wide circuit breakers in compulsory rolling settlement with effect from July 02. trading shall be halted for the remainder of the day. at 10%. Index-based Market-wide Circuit Breakers: The index-based market-wide circuit breaker system applies at 3 stages of the index movement. The price bands for the securities in the Limited Physical Market are the same as those applicable for the securities in the Normal Market. The absolute points are calculated based on closing level of index on the last day of the trading in a quarter and rounded off to the nearest 10 points in case of S&P CNX Nifty. Daily price bands of 10% (either way) on securities as specified by the Exchange..m.m. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. In case of a 15% movement of either index. there will be no trading halt at the 10% level and market shall continue trading. whichever is breached earlier.m. there shall be a two-hour halt if the movement takes place before 1 p. DIV A 40 . In addition to the circuit breakers. These percentages are translated into absolute points of index variations on a quarterly basis. but before 2:00 p. If the 15% trigger is reached on or after 1:00 p. In case the movement takes place at or after 1:00 p. price bands are also applicable on individual securities. If the 15% trigger is reached on or after 2:00 p. CAPITAL MARKET MANAGERIAL ECONOMICS. but before 2:30 p.m. there would be trading halt for ½ hour. there shall be a one-hour halt.. the trading shall halt for remainder of the day. warrants. No price bands are applicable on: scrips on which derivative products are available or scrips included in indices on which derivative products are available.m. 2001. PRICE BANDS Daily price bands are applicable on securities as below: Daily price bands of 5% (either way) on securities as specified by the Exchange. In case of a 20% movement of the index. In case movement takes place at or after 2:30 p. there would be a one-hour market halt if the movement takes place before 1:00 p. MMS – I. There are no price bands for those securities which are available for trading in the Futures and Options segment and securities which form part of the indices on which trading is available in the Futures and Options segment. In case of a 10% movement of either of these indices. preference shares etc).
SOME ARE THE REASONS FOR THE VOLATILITY IN THE INDIAN STOCK MARKET: Inflation rate FII’s Policy Changes Results of Companies International Markets Global Atmosphere Government Change Climatic Factors. September 19.000 mark and reached a historic peak of 16322 while closing.000. 2007. The bull hits because of the rate cut of 50 bit/s in the discount rate by the Fed chief Ben Bernanke in US. FIIs tend to be the momentum movers. the BSE Sensex fell by 615 points in a single day on August 1. the domestic Mutual Funds have taken the opposite approach.733 points. 2007. due to smaller participation by domestic funds [1/3rd of FIIs]. 2007 the Sensex witnessed a huge correction because of selling by Foreign Institutional Investors and global cues to come back to 15. An efficient market is one which responds to news rapidly. FIIs have been the major movers and shakers of the BSE Sensex. 2007 crossed the 16. Prices that adjust are of essence to the efficient functioning of a market economy.VOLATILITY IN INDIAN STOCK MARKET Historically. In most cases. • 16. MMS – I.160 points by noon.The Sensex on September 19. 2007. Following global cues and heavy selling in the international markets. CAPITAL MARKET MANAGERIAL ECONOMICS. the Sensex touched a new high of 15. DIV A 41 . However. Following is the detail analysis of the Indian stock market volatility from 15k to 21k: On July 23. So therefore volatility in Indian stock market is not bad. The job of financial markets is to hold a mirror up to the real economy. SELL when FIIs Buy and vice-versa. etc. On July 27.
This was. down 336. • • Participatory Notes : On October 16.000. SEBI was not happy with P-notes because it was not possible to know who owned the underlying securities. 2007). in the meantime. October 9. SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007.43 points — 3. It failed however to sustain the momentum and closed below 17000. and hedge funds acting through P-notes might therefore cause volatility in the Indian markets.000 mark for the first time. After the market opened at 10:55 AM. This 788 point gain on October 9 was the second biggest single day absolute gains. This is the fastest 1000 points rally ever and also the 640 point rally was the second highest single day rally in absolute terms. the Sensex crashed by 1744 points or about 9% of its value .The Sensex on September 26.04 from the last day's close. however not the end of the volatility.39. the index staged a comeback and ended the day at 18715. 2007). The Sensex closed above 17000 for the first time on the following day.18 during the day. 2007. thus signalling the end of the PN crisis. creating a record for the second fastest 1000 point gain in just 5 trading sessions.000.The Sensex crossed the 18k mark for the first time on October 9.000. The slide continued the next day when the Sensex fell 438. that the government was not against FIIs and was not immediately banning PNs. 2007.82. 2007. Reliance group has been the main contributor in this bull run. It was also during this record bull run that the Sensex for the first time zoomed ahead of the Nikkei of Japan. 18.2 trillion. The sensex closed at 18. The next day (October 18.41 points to settle at 17559. contributing 256 points. the market made a 879-point gain on October 23. CAPITAL MARKET MANAGERIAL ECONOMICS. However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17. 2007. October 15. 19.The Sensex crossed the 19k mark for the first time on October 15. 2007 crossed the 17. This also helped Mukesh Ambani's net worth to grow to over $50 billion or Rs. DIV A 42 . Chidambaram issued clarifications. 2007. September 26. the Sensex tumbled by 717.280 at the end of day.83 per cent — to 17998.the biggest intra-day fall in Indian stock markets in absolute terms till then. 2007. The journey from 17k to 18k took just 8 trading sessions which is the third fastest 1000 point rise in the history of the sensex. Damodaran regarding the new rules. Within a minute of opening trade. MMS – I. This led to automatic suspension of trade for 1 hour.• 17. After detailed clarifications from the SEBI chief M.98 at the end of the week. It took just 4 days to reach from 18k to 19k. Finance Minister P. after touching the lowest level of that week at 17226. This made it a record 3000 point rally in 17 trading sessions overall.
297 sessions taken to touch the 10. 21. Strong FII buying coupled with short covering led to sharp up move. DIV A 43 . MMS – I.000. 2007 19. softening trend in inflation below the four per cent level and Good Kharif crop. The Sensex saw its biggest intra- day fall when it hit a low of 15332. Aggressive buying in financial. strong FII inflows and expectations of good quarterly results. 2007.000 levels.000 January 08. However.000 July 6. it recovered losses to some extent and closed at a loss of 875 points at 16730.The Sensex opened with a positive gap of 324 points at 15613 on the back of firm trend in the global markets. Registering of FII and P notes issue clarification has put momentum into Sensex.• 20. Strong FII Inflows and short covering due to easing of political tension between LEFT and UPA over the Nuclear Deal.000 September 26. It took 11 days to reach from 19k to 20k. there were six 1. In 2007 alone. Trading was suspended for one hour at the Bombay Stock Exchange. 2008 .000 mark from 1.5 point gain but closed below the 20k mark.000 points was covered in just 869 sessions as against 7. 2008 Following is the detail analysis of the Indian stock market volatility In year 2008: Jan 22. October 29. strong foreign fund inflows.It was a Terrible Tuesday for the bourses. 2007 18. • Table showing the movements and reasons in Indian stock market from 15k to 21k: The softening trend in inflation below the five per cent level.000 October 09. down 2273 points. Mar 25. 2007 16. indications of interest rates having peaked. US fed rate cut by 50 basis point. Robust FII inflows and positive sentiments across the boards. 15. 2007 17. 2008 . Expectation of excellent quarterly result and strong forward momentum has played major role. The journey of the last 10. January 8.000 October 29. 2008 .000 October 15. Strong fund flow and expectation of good quarterly result from companies has fuelled this leg of rally.000-point rallies for the Sensex.000 September 19. 2007 21.000.The Sensex crossed the 20k mark for the first time with a massive 734. realty and technology CAPITAL MARKET MANAGERIAL ECONOMICS. 2007 20.A life time high.
. the Sensex recorded a sharp gain of 145 points in that CAPITAL MARKET MANAGERIAL ECONOMICS. As oil.Mumbai: The benchmark index of the Bombay Stock Exchange. Apr 2. the Nifty settled at 3077.07.stocks saw the index surge to higher levels as the day progressed. fell below the 10000 level on Tuesday. The Sensex ended at 13315.While the Sensex ended the week with a gain of 409.. The index touched a high of 16262. 2008 .11 per cent or 386 points. The National Stock Exchange's Nifty ended at 2557. the Sensex ended positively after losing over 705 points during the intraday session while the turnover on the BSE was Rs 7376 crore. realty and bank stocks vaulted higher.25. Sep 18.63 points (10.91.60 up 52. Nov 12. Dec 20.50 with a gain of 156.70 within minutes of commencement of trade today. the Sensex flared up by over 600 points to 16236.. 2008 .23% at 10099. down 13. correction in stocks in September and October. 2008: The Sensex plunged by 1070. MMS – I..7 points. pharma.We take you through the BIGGEST falls in the Indian stock market history. and finally settled. DIV A 44 . 2008 . information technology.96 per cent) to close at 8701. October 24.84 points or 4. mirroring the decline in other key . 2008 . the Sensex. the highest in last two months after a series of bulk deals.15 points or .As front line stocks vaulted to higher levels. 2008 . Oct 24. triggered by what equity strategists are now terming “the biggest margin call in history”.MUMBAI: For the fist time in its history.
DIV A 45 .CAPITAL MARKET MANAGERIAL ECONOMICS. MMS – I.
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