CHANAKYA NATIONAL LAW UNIVERSITY

PROJECT REPORT – LAW RELATING TO FINANCE AND CORPORATE FINANCE,

SECURITIES AND COMPETITION

TOPIC:

STOCK EXCHANGE

SUBMITTED BY

RAHUL RAJ

ROLL NUMBER: 1845

SUBMITTED TO

ABHISHEK KUMAR

FACULTY OF LAW

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RESEARCH METHODOLOGY

Method of Research

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the available resources at library of the Chanakya National Law University
and also the internet sources.

Aims and Objectives

The aim of the project is to present an overview of various aspects relating to ‘stock exchange’.

Scope and Limitations

Though the study of the this topic is an immense project and pages can be written over the topic
but due to certain restrictions and limitations the researcher has not been able to deal with the
topic in great detail.

Sources of Data:

The following secondary sources of data have been used in the project: Cases, Books, Journals,
Articles, etc.

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation

The researcher has followed the bluebook method of citation throughout the course of this
research work.

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 ACKNOWLEDGEMENT

I convey my deepest gratitude to my respected faculty of Investment Law, Dr. Ajay Kumar,
who has been a constant source of inspiration and guided me throughout the interval to
complete this project on ‘Stock Exchange’ successfully.

I wish to record my gratitude to the librarian and other staffs of CNLU library as no academic
venture of mine can be complete without their assistance and co-operation. I owe sincere
regards to them for providing me valuable information through, journals, textbooks and other
necessary data.

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 TABLE OF CONTENTS
1. INTRODUCTION ............................................................ Error! Bookmark not defined.

2. HISTORY AND EVOLUTION OF STOCK EXCHANGE IN INDIA ............................ 7

3. CAPITAL MARKET ......................................................................................................... 9

4. BOMBAY STOCK EXCHANGE.................................................................................... 11

5. NATIONAL STOCK EXCHANGE ................................................................................ 13

6. FEATURES OF STOCK EXCHANGE ......................... Error! Bookmark not defined.6

7. ROLE OF SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) ............ Error!

Bookmark not defined.8

8. PROCEDURE FOR DEALING AT STOCK EXCHANGE ........................................... 20

9. MECHANISM FOR TRADING IN STOCK EXCHANGE ............................................ 22

10. FOREIGN INVESTORS .................................................................................................. 23

11. CONCLUSION ................................................................................................................ 24

12. BIBLIOGRAPHY ........................................................................................................... 25

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 INTRODUCTION

The Securities Contracts (Regulation) Act, 1956 also known as SCRA is an Act of the
Parliament of India enacted to prevent undesirable exchanges in securities and to control the
working of stock exchange in India. According to Indian Securities Contracts (Regulation) Act
of 1956, Stock Exchange is defined under section 2(j) as : “stock exchange means— (a) any
body of individuals, whether incorporated or not, constituted before corporatisation and
demutualisation under sections 4A and 4B, or (b) a body corporate incorporated under the
Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and
demutualisation or otherwise, for the purpose of assisting, regulating or controlling the business
of buying, selling or dealing in securities.”1

A Stock Exchange is a platform for exchanging or selling stocks/shares, securities, and bonds.
Stock Exchanges around the world enable the stock brokers and traders to operate on highly
organised and institutionalized manner. The stock exchanges are regulated by the law of the
country and hence assures the prohibition of fraudulent activities. Stock exchanges may also
provide facilities for issue and redemption of securities and other financial instruments and
capital events including the payment of income and dividends. Securities traded on a stock
exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment
products and bonds. Stock exchanges often function as "continuous auction" markets with
buyers and sellers consummating transactions at a central location such as the floor of the
exchange.2

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly less linked to such a
physical place, as modern markets use electronic networks, which give them advantages of
increased speed and reduced cost of transactions.3 Trade on an exchange is restricted to brokers
who are members of the exchange. The initial public offering of stocks and bonds to investors
is by definition done in the primary market and subsequent trading is done in the secondary
market. A stock exchange is often the most important component of a stock market. Supply
and demand in stock markets are driven by various factors that, as in all free markets, affect
the price of stocks

1
S.2(j) of Indian Securities Contracts (Regulation) Act of 1956
2
Lemke and Lins, Soft Dollars and Other Trading Activities, §2:3 (Thomson West, 2013-2014 ed.
3
Lemke and Lins, Soft Dollars and Other Trading Activities, §§2:25 - 2:30 (Thomson West, 2013-2014 ed.

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A particular share is eligible to be traded in the stock market where the company is listed with.
A company is allowed to list its stock after it meets some predefined criteria for that particular
stock exchange. In the earlier days, there were centralised physical forms of stock exchange.
But with changing technologies the market has taken an electronic form where most of the
transaction happens over the networked computers. Only the registered brokers of a trade
exchange are allowed to perform any exchange operations. In stock markets, often the process
of continuous auction of assets is performed.

One country may have one or more stock exchange. Some of the major stock exchanges around
the world are New York Stock Exchange, NASDAQ, London Stock Exchange Group, Hong
Kong Stock Exchange, Shanghai Stock Exchange, Bombay Stock Exchange and Euronext. The
Amsterdam Stock Exchange established in 1602 is the world’s first stock exchange.

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 HISTORY AND EVOLUTION OF STOCK EXCHANGE IN INDIA

Before we study the historic volatile days of the ten years, let us first know what are Stock
Markets and Stock exchanges.

Stock Market is a market where the trading of company stock, both listed securities and
unlisted takes place. It is different from stock exchange because it includes all the national
stock exchanges of the country. For example, we use the term, "the stock market was up today"
or "the stock market bubble."

Stock Exchanges are an organized marketplace, either corporation or mutual organization,

where members of the organization gather to trade company stocks or other securities. The
members may act either as agents for their customers, or as principals for their own accounts.
Stock exchanges also facilitates for the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is central but
trade is linked to such physical place because modern markets are computerized. The trade on
an exchange is only by members and stock broker do have a seat on the exchange.

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities. In the
1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840
and 1850. An informal group of 22 stockbrokers began trading under a banyan tree opposite
the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of
Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the
exchange flourished with 60 brokers. In fact the 'Share Mania' in India began with the American
Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers
increased to 250. The informal group of stockbrokers organized themselves as the The Native
Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay
Stock Exchange (BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the
BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and
Hammam Street in downtown Mumbai) was acquired, and a building was constructed and
occupied in 1930. Premchand Roychand was a leading stockbroker of that time, and he assisted
in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock

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Exchange and they are still being followed. Several stock broking firms in Mumbai were family
run enterprises, and were named after the heads of the family.

The following is the list of some of the initial members of the exchange, and who are still
running their respective business:

• D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with
Merrill Lynch)
• Jamnadas Morarjee (now known as JM)
• Champaklal Devidas (now called Cifco Finance)
• Brijmohan Laxminarayan

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act.

The most decisive period in the history of the BSE took place after 1992. In the aftermath of a
major scandal with market manipulation involving a BSE member named Harshad Mehta, BSE
responded to calls for reform with intransigence. The foot-dragging by the BSE helped
radicalise the position of the government, which encouraged the creation of the National Stock
Exchange (NSE), which created an electronic marketplace. NSE started trading on 4 November
1994. Within less than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it
never caught up with NSE spot market turnover. The second strategic failure at BSE came in
the following two years. NSE embarked on the launch of equity derivatives trading. BSE
responded by political effort, with a friendly SEBI chairman (D. R. Mehta) aimed at blocking
equity derivatives trading. The BSE and D. R. Mehta succeeded in delaying the onset of equity
derivatives trading by roughly five years. But this trading, and the accompanying shift of the
spot market to rolling settlement, did come along in 2000 and 2001 - helped by another major
scandal at BSE involving the then President Mr. Anand Rathi. NSE scored nearly 100% market
share in the runaway success of equity derivatives trading, thus consigning BSE into clearly
second place. Today, NSE has roughly 66% of equity spot turnover and roughly 100% of equity
derivatives turnover. Stock Exchange provides a trading platform, where buyers and sellers can
meet to transact in securities.

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 CAPITAL MARKET

Capital market is the Centre or arrangement that provides facilities for buying and selling of
long-term financial claims. It is the market where transactions are made in long term securities
such as stocks and bonds. The participants of this market includes various financial institutions,
mutual funds, agents, brokers, dealers and other borrowers and lenders of long term debt and
equity capital.4 The capital market is divided into two segments viz: Primary Market and
Secondary Market

1. Primary Market: Most companies are usually started privately by their promoters.
However the promoters’capital and the borrowed capital from banks or financial
institutions might not be sufficient for running the business over the long term. That is when
corporate and the government looks at the primary market to raise long term funds by
issuing securities such as debt or equity. These securities may be issued at face value, at
premium or at discount. Let us understand the meaning of these terms:
• Face Value: Face value is the original cost of the security as shown in the
certificate/instrument. Most equity shares have a face value of Rs. 1, Rs. 5, Rs. 10
or Rs. 100 and do not have much bearing on the actual market price of the stock.
When issuing securities, they may be offered at a discount or at a premium.
• Premium: When the security is offered at a price higher than the face value it is
called a premium
• Discount: When the security is offered at a price lower than the face value it is
called a discount.

2. Secondary Market: The secondary market provides liquidity to the investors in the
primary market. Today we would not invest in any instrument if there was no medium to
liquidate our position. The secondary markets provide an efficient platform for trading of
those securities initially offered in the primary market. Also those investors who have
applied for shares in an IPO may or may not get allotment. If they don‘t then they can
always buy the shares (sometimes at a discount or at a premium) in the secondary market.
Trading in the secondary market is done through stock exchange. The Stock exchange is a

4
Anonymous, at http://www.indianmba.com/Faculty_Column/FC316/fc316.html, Accessed on November 2,
2017 at 03:20 AM.

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 place where the buyers and sellers meet to trade in shares in an organized manner. The
stock exchange performs the following functions:
• Provide trading platform to investors and provide liquidity
• Facilitate Listing of securities
• Registers members - Stock Brokers, sub brokers
• Make and enforce by-laws
• Manage risk in securities transactions
• Provides Indices

The initial emergence of stock markets in the world can be traced back over hundreds of years
to when industrialization and innovation took hold in Europe. The rapid economic growth in
the past one hundred years gave rise to the explosive development of stock markets. At the
same time the enhancement of stock markets has played an important role in promoting the
growth of the world economy. The modern market economy depends to a greater extent on a
soundly operated stock market.5

Stock market provides liquidity to the financial instruments which are issued in the primary
market. Players in the capital market are broadly divided in to three categories:

• Companies issuing securities and includes new companies, existing unlisted

companies and the existing listed companies.
• Intermediaries who assist in the process of transferring savings into investment
and they include merchant bankers, underwriters, registrars to issue and share
transfer agents, brokers, depositories, collecting agents, advertising agencies,
agents, mutual funds etc.
• Investors consisting of institutional investors and the general public.6

5
Anonymous, at https://www.investopedia.com/articles/stocks/09/indian-stock-market.asp., Accessed on
November 2, 2017 at 03:20 AM.
6
Anonymous, at https://bq.training/blog/introduction-to-stock-exchange/., Accessed on November 2, 2017 at
03:20 AM.

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 BOMBAY STOCK EXCHANGE (BSE)

As we read in the history of Indian stock exchange; the stock exchange, Mumbai, popularly
known as "BSE". BSE was established in 1875 as "The Native Share and Stock Brokers
Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which
was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and
has converted itself into demutualised and corporate entity. It has evolved over the years into
its present status as the Premier Stock Exchange in the country. It is the first Stock Exchange
in the Country to have obtained permanent recognition in 1956 from the Govt. of India under
the Securities Contracts (Regulation) Act, 1956.7

The Exchange, while providing an efficient and transparent market for trading in securities,
debt and derivatives upholds the interests of the investors and ensures redressal of their
grievances whether against the companies or its own member-brokers. It also strives to educate
and enlighten the investors by conducting investor education programmes and making
available to them necessary informative inputs.

A Governing Board having 20 directors is the apex body, which decides the policies and
regulates the affairs of the Exchange. The Governing Board consists of 9 elected directors, who
are from the broking community (one third of them retire every year by rotation), three SEBI
nominees, six public representatives and an Executive Director & Chief Executive Officer and
a Chief Operating Officer.8

The Executive Director as the Chief Executive Officer is responsible for the day-to-day
administration of the Exchange and he is assisted by the Chief Operating Officer and other
Heads of Department. The Exchange has inserted new Rule in its Rules, Bye-laws &
Regulations pertaining to constitution of the Executive Committee of the Exchange.
Accordingly, an Executive Committee, consisting of three elected directors, three SEBI
nominees or public representatives, Executive Director & CEO and Chief Operating Officer
has been constituted. The Committee considers judicial & quasi matters in which the
Governing Board has powers as an Appellate Authority, matters regarding annulment of
transactions, admission, continuance and suspension of member-brokers, declaration of a

7
Anonymous, at https://in.reuters.com/finance/markets/india-stock-market, Accessed on November 2, 2017
at 03:20 AM.
8
Anonymous, at https://economictimes.indiatimes.com/markets/stocks/news/behind-the-professional-veil-of-
national-stock-exchange/articleshow/56192096.cms, Accessed on November 2, 2017 at 03:20 AM.

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member broker as defaulter, norms, procedures and other matters relating to arbitration, fees,
deposits, margins and other monies payable by the member brokers to the Exchange, etc.

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 NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange (NSE) is India's leading stock exchange covering 364 cities and
towns across the country. NSE was set up by leading institutions to provide a modern, fully
automated screen-based trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It has set up
facilities that serve as a model for the securities industry in terms of systems, practices and
procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualisation
of stock exchange governance, screen based trading, compression of settlement cycles,
dematerialisation and electronic transfer of securities, securities lending and borrowing,
professionalization of trading members, fine-tuned risk management systems, emergence of
clearing corporations to assume counterparty risks, market of debt and derivative instruments
and intensive use of information technology.9

The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of a
National Stock Exchange by financial institutions (FIs) to provide access to investors from all
across the country on an equal footing. Based on the recommendations, NSE was promoted by
leading Financial Institutions at the behest of the Government of India and was incorporated in
November 1992 as a tax-paying company unlike other stock exchanges in the country. On its
recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April
1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment commenced operations in November 1994 and
operations in Derivatives segment commenced in June 2000.

NSE's mission is setting the agenda for change in the securities markets in India. The NSE was
set-up with the following objectives:

9
Anonymous, at https://economictimes.indiatimes.com/topic/National-Stock-Exchange, Accessed on
November 2, 2017 at 03:20 AM.

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 • establishing a nation-wide trading facility for equities, debt instruments and
hybrids,
• ensuring equal access to investors all over the country through an appropriate
communication network,
• providing a fair, efficient and transparent securities market to investors using
electronic trading systems,
• enabling shorter settlement cycles and book entry settlements systems, and
• Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technologies have become industry
benchmarks and are being emulated by other market participants. NSE is more than a mere
market facilitator. It's that force which is guiding the industry towards new horizons and greater
opportunities.

Till the advent of NSE, an investor wanting to transact in a security not traded on the nearest
exchange had to route orders through a series of correspondent brokers to the appropriate
exchange. This resulted in a great deal of uncertainty and high transaction costs. One of the
objectives of NSE was to provide a nationwide trading facility and to enable investors spread
all over the country to have an equal access to NSE. NSE has made it possible for an investor
to access the same market and order book, irrespective of location, at the same price and at the
same cost. NSE uses sophisticated telecommunication technology through which members can
trade remotely from their offices located in any part of the country. NSE trading terminals are
present in 363 cities and towns all over India. NSE has been promoted by leading financial
institutions, banks, insurance companies and other financial intermediaries

NSE is one of the first demutualised stock exchanges in the country, where the ownership and
management of the Exchange is completely divorced from the right to trade on it. Though the
impetus for its establishment came from policy makers in the country, it has been set up as a
public limited company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership,
management and trading is in the hands of three different sets of people. NSE is owned by a
set of leading financial institutions, banks, insurance companies and other financial
intermediaries and is managed by professionals, who do not directly or indirectly trade on the

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Exchange.10 This has completely eliminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement, support
and contribution of trading members in a variety of ways. Its Board comprises of senior
executives from promoter institutions, eminent professionals in the fields of law, economics,
accountancy, finance, taxation, etc, public representatives, nominees of SEBI and one full time
executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market operations are
delegated by the Board to various committees constituted by it. Such committees include
representatives from trading members, professionals, the public and the management. The day-
to-day management of the Exchange is delegated to the Managing Director who is supported
by a team of professional staff

10
Anonymous, at http://ezinearticles.com/?What-Are-the-Advantages-and-Disadvantages-of-Online-
Trading?&id=7087346.,

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 FEATURES OF STOCK EXCHANGE

The various characteristics and features of stock exchange are as follows:

➢ Effective Mobilisation of savings: Stock exchanges provide organised market for an

individual as well as institutional investors. They regulate the trading transactions with
proper rules and regulations in order to ensure investor's protection. This helps to
consolidate the confidence of investors and small savers. Thus, stock exchanges attract
small savings especially of large number of investors in the capital market.11
➢ Market for securities: Stock exchange is a market, where securities of corporate
bodies, government and semi-government bodies are bought and sold. Online price
quoting system and online buying and selling facility have changed the nature and
working of stock exchanges. Formerly, the dealings on stock exchanges were restricted
to its headquarters. The investors across the country were absolutely in dark about the
price fluctuations on stock exchanges due to the lack of information. But today due to
Internet, on line quoting facility is available at the computers of investors. As a result,
they can keep track of price fluctuations taking place on stock exchange every second
during the working hours. Certain T.V. Channels like CNBC are fully devoted to stock
market information and corporate news. Even other channels display the on line quoting
of stocks. Thus, modern stock exchanges backed up by internet and information
technology provide wide marketability to securities of the industries. Demat facility has
revolutionized the procedure of transfer of securities and facilitated marketing.12
➢ Regulates trade in securities: Stock exchange does not buy or sell any securities on
its own account. It merely provides the necessary infrastructure and facilities for trade
in securities to its members and brokers who trade in securities. It regulates the trade
activities so as to ensure free and fair trade
➢ Allows dealings only in listed securities: In fact, stock exchanges maintain an official
list of securities that could be purchased and sold on its floor. Securities which do not
figure in the official list of stock exchange are called unlisted securities. Such unlisted
securities cannot be traded in the stock exchange.
➢ Transactions effected only through members: All the transactions in securities at the
stock exchange are effected only through its authorised brokers and members. Outsiders

11
Anonymous, at http://kalyan-city.blogspot.in/2010/11/role-of-stock-exchanges-in-capital.html ,
12
Anonymous, at http://www.businessmanagementideas.com/financial-management/depository-
system/depository-system-meaning-facilities-and-advantages/4206.,.

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 or direct investors are not allowed to enter in the trading circles of the stock exchange.
Investors have to buy or sell the securities at the stock exchange through the authorised
brokers only.
➢ Working as per rules: Stock exchanges through their by-laws, Securities and
Exchange Board of India (SEBI) guidelines, transparent procedures try to provide
safety to the investment in industrial securities. Buying and selling transactions in
securities at the stock exchange are governed by the rules and regulations of stock
exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is
allowed in any case.13
➢ Specific location: Stock exchange is a particular market place where authorised brokers
come together daily (i.e. on working days) on the floor of market called trading circles
and conduct trading activities. The prices of different securities traded are shown on
electronic boards. After the working hours market is closed. All the working of stock
exchanges is conducted and controlled through computers and electronic system.
➢ Financial resources for public and private sectors: Stock Exchanges make available
the financial resources available to the industries in public and private sector through
various kinds of securities. Due to the assurance of liquidity, marketing support,
investment safety assured through stock exchanges, the public issues of securities by
these industries receive strong public response (resulting in over subscription of issue).
➢ Funds for Development Purpose: Stock exchanges enable the government to mobilize
the funds for public utilities and public undertakings which take up the developmental
activities like power projects, shipping, railways, telecommunication, dams & roads
constructions, etc. Stock exchanges provide liquidity, marketability, price continuity
and constant evaluation of government securities.
➢ Financial Barometers: Stock exchanges are the financial barometers and
development indicators of national economy of the country. Industrial growth and
stability is reflected in the index of stock exchange.

ROLE OF SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

13
Anonymous, at http://archive.indianexpress.com/news/depository-system/761907/,

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Securities and Exchange Board of India (SEBI) is an apex body for overall development and
regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set
up as a non-statutory body. Later on it became a statutory body under the Securities Exchange
Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically
all the aspects of capital market operations.

The role or functions of SEBI are discussed below.

1. To protect the interests of investors through proper education and guidance as regards
their investment in securities. For this, SEBI has made rules and regulation to be
followed by the financial intermediaries such as brokers, etc. SEBI looks after the
complaints received from investors for fair settlement. It also issues booklets for the
guidance and protection of small investors.
2. To regulate and control the business on stock exchanges and other security markets.
For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers
is made compulsory and they are expected to follow certain rules and regulations.
Effective control is also maintained by SEBI on the working of stock exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock
brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries
operating on the securities market. In addition, to provide suitable training to
intermediaries. This function is useful for healthy atmosphere on the stock exchange
and for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of
India). SEBI has made rules and regulations to be followed by mutual funds. The
purpose is to maintain effective supervision on their operations & avoid their unfair and
anti-investor activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory
powers. However, self-regulation is better than external regulation. Here, the function
of SEBI is to encourage intermediaries to form their professional associations and
control undesirable activities of their members. SEBI can also use its powers when
required for protection of small investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the
interest of investors. For this, SEBI has issued suitable guidelines so that such mergers
and takeovers will not be at the cost of small investors.

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 7. To prohibit fraudulent and unfair practices of intermediaries operating on securities
markets. SEBI is not for interfering in the normal working of these intermediaries. Its
function is to regulate and control their objectional practices which may harm the
investors and healthy growth of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are
prepared for first public issue of new companies, for public issue by existing listed
companies and for first public issue by existing private companies. SEBI is expected to
conduct research and publish information useful to all market players (i.e. all buyers
and sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-
regulating organizations and to take suitable remedial measures wherever necessary.
This function is undertaken for orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for
avoiding undesirable activities of brokers and securities scams.

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 PROCEDURE FOR DEALING AT STOCK EXCHANGE

Before selling the securities through stock exchange, the companies have to get their securities
listed in the stock exchange.14 The name of the company is included in listed securities only
when stock exchange authorities are satisfied with the financial soundness and other aspects of
the company.

1. Selection of a Broker: Persons who want to buy and sell securities cannot act directly on a
stock exchange because trading in securities in a stock exchange is allowed through brokers.
Therefore, the first thing to be done is the selection of a broker through whom buying or selling
of securities it to be done. A broker of repute should be selected so that fair dealings may be
expected from him.

2. Placing an Order: After making a choice of the broker, the intending buyer or seller places
an order for purchase or sale of securities. Brokers open account for each of their clients. Before
opening of account of a client, a broker may seek bank guarantee from his client. Client places
an order to his broker of his requirement of purchasing or selling securities. In his order, the
client tells about the quantity and tentative price of purchase or sale. The broker will try to
make purchases or sale of securities as far as possible to the nearest price offered by the client.

3. Making the Contract: After getting an order from the client, the broker or his authorized
clerk makes efforts to materialize the order on the floor of exchange. A deal is struck when the
other party also agrees and this becomes a contract of purchase of securities on the part of one
party and a contract of sale on the part of the other party. When a deal is struck it is announced
by another party mentioning the price, name and number of security and bargain is noted by
both the parties in their note books. After this the seller of securities is sent a selling note and
the purchaser of securities is sent a buying note mentioning the details of securities traded.15

4. Settlement: Settlement of account depends upon the type of transaction whether it is cash
or forward. Cash transaction is a spot transaction and payment is made on the delivery of
securities. This type of transaction is also known as investment transaction because it is based

14
Anonymous, at https://www.nseindia.com/getting_listed/content/eligibility_criteria.html
15
Samiksha Seth, ‘The Trading Procedure on a Stock Exchange – Explained!, available at:
http://www.yourarticlelibrary.com/stock-exchange/the-trading-procedure-on-a-stock-exchange-
explained/8760.

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on bona fide intention or purchase and sale of securities. On the other hand, a forward
transaction is of a speculative nature and reveals forward delivery contract.16

It can be settled in any of the following three ways:

(i) Securities are delivered and payment is received on fixed settlement day after
cancelling all intermediate purchases and sales. Such type of settlement is known
as liquidation in full.

(ii) On fixed settlement days, securities are not delivered but only the different between
ruling price and agreed price is settled. This type of settlement is known as
liquidation by payment of differences.

(iii) When settlement is not made on fixed settlement date and it is desired that
settlement should be carried forward to the next settlement period, is known as carry
over to the next settlement. For giving the facility of carry over the broker makes a
charge known as contango or backwardation. The account of the client is debited
with contango charge (i.e. a payment made by way of interest) if it is the purchase
which is being carried forward. If the sale is being carried forward (i.e. delivery of
securities is due), the amount to be debited by way of compensation is known as
backwardation. Contango charge is also known as badla charge and it should be
calculated on the amount carried forward and for the period of next settlement date
from this settlement date. Settlement day falls after 15 days or one month according
to the byelaws of the stock exchange.

16
Anonymous, at http://finance.mapsofworld.com/secondary-market/,

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 MECHANISM OF TRADING IN STOCK EXCHANGE

There are two ways by which trading can be done in stock exchange are Floor Trading or
Electronic Trading.17

Floor Trading: The floor where trading activities are conducted. Trading floors are found in
the buildings of various exchanges, such as the Indian Stock Exchange and the Bombay Board
of Trade. These floors represent the area where traders complete the buying or selling of an
asset.

Electronic Trading: Electronic trading, sometimes called e-trading, is a method of trading

securities (such as stocks, and bonds), foreign exchange or financial derivatives electronically.
Information technology is used to bring together buyers and sellers through electronic trading
platform and networks to create a virtual market places.
Settlement Cycle and Trading Hours
Stock markets follow a T+2 rolling settlement. This means that any trade taking place on
Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9:55
am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery
of shares must be made in dematerialized form, and each exchange has its own clearing house,
which assumes all settlement risk, by serving as a central counterparty.

17
Samiksha Seth, ‘The Trading Procedure on a Stock Exchange – Explained!, available at
http://www.yourarticlelibrary.com/stock-exchange/the-trading-procedure-on-a-stock-exchange-
explained/8760.,.

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 FOREIGN INVESTORS

India started permitting outside investments only in the 1990s. Foreign investments are
classified into two categories: foreign direct investment (FDI) and foreign portfolio investment
(FPI). All investments in which an investor takes part in the day-to-day management and
operations of the company, are treated as FDI, whereas investments in shares without any
control over management and operations, are treated as FPI.

For making portfolio investment in India, one should be registered either as a foreign
institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both
registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly
consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance
companies, banks, asset management companies etc. At present, India does not allow foreign
individuals to invest directly into its stock market. However, high-net-worth individuals (those
with a net worth of at least $US50 million) can be registered as sub-accounts of an FII.18

Foreign institutional investors and their sub accounts can invest directly into any of the stocks
listed on any of the stock exchanges. Most portfolio investments consist of investment in
securities in the primary and secondary markets, including shares, debentures and warrants of
companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest
in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve
Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any
stock exchange.19

An FII registered as a debt-only FII can invest 100% of its investment into debt instruments.
Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30%
can be invested in debt. FIIs must use special non-resident rupee bank accounts, in order to
move money in and out of India. The balances held in such an account can be fully repatriated.

18
Anonymous, at https://www.nseindia.com/invest/content/complaints_exchange.htm,
19
Anonymous, at https://www.nseindia.com/technology/content/trad_tech_dma.htm ,

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 CONCLUSION

Indian stock markets had taken significantly less time to complete the dematerialization task
and electronic trading as compared to some of the developed markets. This was mainly because
of the deadlines kept by SEBI for dematerialisation, fully electronic platform and compulsory
compliance norms issued by the regulatory authority in order to finish the entire process in a
time bound manner. In short, the Indian stock market has experienced some revolutionary
changes in its functioning over the years, especially with the introduction of dematerialisation
and post dematerialisation era.

SEBI has allowed the use of internet as an order routing system for communicating investors’
orders to the exchanges through the registered brokers. SEBI has also allowed trading through
wireless medium or Wireless Application Protocol (WAP) platform. This particularly helps
those retail investors, who are mobile and want to trade from any place.

The Financial services sector cannot remain and work in isolation unless it makes use of the
latest information technology device. In India, there are about millions of net users and this
number will be exceeding with years. The SEBI committee and panel on internet trading
suggested linking the Internet System to the trading systems of the Exchanges so as to minimise
the delay in order execution which exists in the present system. The main benefits of Internet
Trading System are lower transaction costs, wider client reach, hands off servicing and offering
more services. Internet trading has changed the system and the way markets work. The Internet
may also provide depth to the market. Therefore, it can be concluded that in a country like
India, the Internet Trading will make the Stock Market most automated and also at the reach
amongst large segment of the population.
Thus, stock exchange serves the nation in several ways through its diversified economic
services which include imparting liquidity to investments, providing marketability, enabling
evaluation and ensuring price continuity of securities.

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 BIBLIOGRAPHY

BOOKS:

• By Hiremath and Gourishankar ‘Indian Stock Market, An Empirical Analysis of

Informational Efficiency’, 2012.
• By Zvi Bodie, ‘Investments Paperback’ – 15 Jul 2009

WEBSITES:

• www.moneycontrol.com
• www.bseindia.com
• www.nseindia.com
• www.sebi.gov.in
• www.capitalmarket.com
• www.indianmba.com
• www.trendwatch.com
• www.indianexpress.com
• www.economictimes.om

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